The swings in the rupee impact corporate balance sheets of all hues — importers, exporters, overseas borrowers. The currency also impacts the Reserve Bank of India’s balance sheet and the dividend it pays out to the government. More so now than before.
The RBI adopted a new economic capital framework in 2019. As part of that, the central bank committed to hold retained earnings of at least 5.5% of assets. Alongside that framework, the central bank adopted a significantly different method of accounting for its currency and gold sales.
Starting FY19, the RBI decided, on the recommendation of committees that had looked into the matter, that any sales of foreign currency would be compared with the weighted average holding cost of the currency, and this difference is taken to the RBI’s income statement as realised profit (or loss). Until then, the central bank would compare any sales to the weekly revaluation rate, leaving little in terms of profit or loss to be transferred.
The changes adopted by the RBI mean that the movement in the rupee may have a greater bearing on the central bank’s dividend transfer to the government.