23 July 2020
The Economy Observer
A Primer on RBI’s Balance Sheet
Expounding its divergence vis-à-vis money supply measures
The Reserve Bank of India (RBI) has injected large liquidity into the financial system during the past five months through
various measures. It has cut policy interest rates, (temporarily) reduced the cash reserve ratio (CRR) and announced
long-term refinance operations (LTROs) – targeted or not. Consequently, the banking system’s net surplus has increased
from INR3t (or 2.2% of NDTL) in early 2020s to INR4.3t (or ~3% of NDTL) currently. In this note, we discuss the impact of
these liquidity-enhancing measures on the RBI’s balance sheet and money supply.
Since mid-Feb’20 (when the first LTRO was conducted), the RBI’s balance sheet has increased by about INR9.5t to
INR54t as at 10 Jul’20. This has led the annual growth rate to more than double – from 14% in early 2020 to >30%
currently. Almost half of the expansion in the RBI’s balance sheet is attributed to foreign currency assets (including gold
coins and bullion), another 30% by LTROs and the remaining 20% by purchase of domestic securities.
However, it is interesting to note that for the second time in the past two decades, the RBI’s balance sheet has diverged
substantially from the reserve money (or the ‘M0’), which has increased by INR2t since mid-Feb’20 (~14% YoY) – only
about a fifth of the former. Although this may seem perplexing, an understanding of the components of the RBI’s
balance sheet and M0 helps explain this spurious puzzle.
Further, the annual growth in broad money supply (or the ‘M3’) also picked up to 12.4% YoY – the highest in the past six
years – supported almost entirely by the high fiscal deficit. Still, we do not believe it to be inflationary because (a) the
credit-deposit ratio (wherein the numerator includes net credit of the RBI and the banking sector to the government
and the private/commercial sector) is currently at ~111%, similar to the levels in the past two years, and (b) the
government has resisted massive fiscal stimulus, which implies that unless commercial lending picks up quickly (which
is not our base case), broad money supply will taper off in coming months.
Finally, while it is hoped that the RBI will intervene in the treasury market to support bond yields, it is an extremely
difficult task to accomplish, especially if foreign capital inflows remain strong.
RBI’s balance sheet has expanded massively in 2020…:
Since mid-Feb’20 – when
the RBI announced its first LTRO – its balance sheet has expanded by record INR9.5t
up to the week ended 10
Jul’20. This surge in the past five months is higher than
the cumulative rise in the RBI’s balance sheet during the previous two years
It has grown at an annual rate of 30% during the past four months, marking the
highest growth since the pre-GFC period in 2007-08
RBI’s balance sheet has increased by INR9.5t since
the first LTRO was conducted in mid-Feb’20…
Change in RBI's balance sheet
…and has grown at an average of ~30% in the past
RBI balance sheet
* FY20 is up to mid-Feb’20/FY21 starts from mid-Feb’20
Source: RBI, CEIC, MOFSL
Nikhil Gupta – Research Analyst
– Research Analyst
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