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RBI sharply cut dividend transfer to Centre

The Reserve Bank of India has sharply cut its annual dividend transfer to the Centre for 2017 by reducing to Rs. 30,659 Crore from Rs. 58,000 Crore budgeted by the Centre and about Rs. 65,876 Crore transferred in 2016. Now, as an approximate 50% fall in such transfers has occurred.

Higher interest costs paid by the RBI to banks after demonetisation, a bigger transfer to the contingency reserve & the loss incurred on printing new currency (Seigniorage losses) are the main reasons for the same.

Seigniorage is a term used for the profits governments make by minting currency. It is the difference between the face value of a currency note or coin, and its actual production cost. For instance, if the cost of printing a Rs. 2,000-note is about Rs. 4, printing one such note and putting it into circulation fetches a profit of Rs. 1,996. Usually central banks earn this profit and transfer it to the Government. It is normal to assume that whenever RBI issues new currency, the RBI will pocket a profit. Higher denomination notes earn higher profits. However, things are different in the case of coins where the cost of minting can is usually equal to the face value, and can fluctuate based on the price of base metal. Unusually, in FY17, the RBI made a loss from seignorage.

When demonetisation was announced, it had to call back and extinguish all the Rs. 500 and Rs. 1000 notes in circulation. Rs. 15.4 lakh crore (face value) worth of currency was demonetised and 90 per cent of it had to be reprinted within the year.

SBI’s chief economist noted in a recent research report that seigniorage loss and the extra interest that the RBI paid, took out Rs. 26,000 crore from its dividend payout this year. Had the note ban resulted in a lot of money not returning to the RBI, the windfall profit therein could have made up for the seigniorage loss but that didn’t happen.

Source: Business Standard, The Hindu