The Signal: First Impressions: RBI’s Financial Statements for FY22

If you loved reading RBI’s FY22 Annual Report, you must read Defoe’s Robinson Crusoe 

An aspirational young man defies the rules to set out on an adventure of his own. Caught off-guard by ill fortune and stranded on an island fraught with challenges, the young man’s story is a powerful narrative on the power of will, self-transformation and greatness beyond survival. An easy reading through the contents of the report urges one to liken the Indian economy’s current state to that of the protagonist while in the thick of the plot.

In a risky gambit for growth, the central bank remained latched to its accommodative stance for rather long. While the world kickstarted its liquidity tightening regime, RBI maintained status quo. Many viewed the action to stay put as inaction while RBI “lagged behind the curve”. However, as calm as the duck appeared, it was paddling hard underwater.

Sharing some super interesting insights from the financial statements alone.

Rainy days ahead, GoI parched today

An income growth of 20% YoY may seem non-impressive on a base dealt by the pandemic year, but an absolute increment of 7% versus the pre-pandemic FY20 reflects promise. It is one thing to climb uphill and another to do the same after rolling into a trench. The INR 1.3 Tn expenditure, up by 3x versus previous fiscal, may raise brows at first but a closer look would reflect something more astonishing. This expenditure includes almost INR 1.15 Tn allocation towards a contingency fund. This allocation is 5.5x higher versus a similar allocation during the pandemic-troubled year of FY21 and 1.5x over the pre-pandemic year FY20. A larger allocation towards contingencies, especially after a year that witnessed a form of contingency, does lend quite a relief. Such a contingency reserve comes extremely handy especially during situations of extreme stress induced by markdowns in held securities, pressure owing to increased intervention in the forex markets or disruptions created by tactical monetary policy decisions. The significantly higher allocation to the contingent fund comes along with a decade-low dividend payout of INR 0.3 Tn. While the effect reinstates confidence in the central bank’s ability to weather storms, but brings along concerns pertaining to pressure on already-challenges fiscal position of the government. The government continues to face fiscal headwinds in the form of duty cuts and subsidies being rolled out in an attempt to shield households from scorching inflation. The discussion on India’s fiscal position, stance and future shall remain reserved for another day.

A higher balance

The balance sheet expanded by ~8.5% courtesy investments from global as well as domestic entities along with an increase in value of gold held. Speaking of composition and contribution to total assets, domestic assets comprised of 28.2% (vs. 26.4% FY21) while foreign currency assets and gold contributed to 71.8% (vs. 73.6% FY21). The section on investments and inflows led me straight to the state of foreign exchange reserves which did not disappoint. The foreign exchange reserve grew by 5.25% YoY to US $607.3 Bn as on FY22. Sure, the current state is far more precarious with dwindling reserves as the central bank grapples with the recent slew of economic challenges. At the time of writing this note and considering the pace of import to continue basis run-rate, we probably have enough to cover ~10 months’ worth of import bill. Not scary at the moment, but the pace of decline in reserves sure deserves to break a sweat on your brow.

Other notable balance sheet movements would be the ~51% reduction in outstanding loans to state governments and increase of ~7.2x under the head ‘loans and advances to financial institutions outside India’ mainly attributable to increase in volume of reverse repo transactions.

Bankers’ roll

The central bank’s net earnings from foreign and domestic sources increased by ~11% and ~34% YoY, respectively. Key line items impacting domestic earnings would include interest earned on rupee-denominated securities which includes oil bonds and a meaningfully higher interest outflow on LAF operations critical to manage the liquidity situation. While the jump in interest income from the mentioned rupee-securities is meaningful, it is worth noting that FY22 accounted for the full 12 months of the fiscal while the pandemic-struck year of FY21 accounted for a financial quarter less. The extra quarter also helped shore up commission earnings along with fees for banking services rendered to the government. This includes flotation charges charged to central and state governments for loans issued and management commission received on account of servicing outstanding loans. Bankers will be bankers, hah!

Costly money (literally)

Within expenses, an important mention made was about the 2,22,205 lakh pieces of currency supplied in FY22 which is 0.36% lower than what was supplied last fiscal. While supply of money and money in circulation are critical subjects, I am yet to ascertain the analytical significance of “pieces of currency” supplied. The quest for an answer led me further down the path only to hit another curve – cost of printing. Cost of printing a lower number of currency pieces increased by ~INR 973 Cr. to INR 4,984 Cr. The increment may seem meaningful in absolute terms, but not as much when viewed in context of the total amount spent. The total amount spent may not seem much at first, but the YoY increase of ~25% in the cost is anything but trivial. Also, considering that the number of currency pieces actually dropped versus previous FY. Does this have to do with the exponential rise in cotton prices in the last two years? Or is it because of the increase in cost of chemical feedstock used in the special inks? Either way, it is almost funny that inflation has not made money just expensive, but also expensive.

Happy Reader

The financial statements, when considered along with prevailing economic context, reinstates faith in the central bank’s rather artistic ability to balance multiple agendas while walking the rope. The path ahead is fraught with challenges, approaching from directions and in forms barely conceivable. But there’s hope that future will testify that the Indian economy is a powerful narrative on the power of will, self-transformation and greatness beyond survival.