Annual Report

We, the undersigned auditors of the Reserve Bank of India, do hereby report to the Central Government upon the Balance Sheet of the Bank as at June 30, 2005 and the Profit and Loss Account for the year ended on that date.

We have examined the above Balance Sheet of the Reserve Bank of India as at June 30, 2005 and the Profit and Loss Account of the Bank for the year ended on that date and report that where we have called for information and explanations from the Bank, such information and explanations have been given and have been satisfactory.

These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion and according to the best of our information and explanations given to us and as shown by the books of account of the Bank, the Balance Sheet read with Significant Accounting Policies and Notes to the Accounts is a full and fair Balance Sheet containing all necessary particulars and is properly drawn up in accordance with the Reserve Bank of India Act, 1934 and Regulations framed thereunder so as to exhibit a true and correct view of the state of the Bank’s affairs, in conformity with the accounting principles generally accepted in India.

The financial statements are prepared in accordance with the Reserve Bank of India Act, 1934 and the notifications issued thereunder and in the form prescribed by the Reserve Bank of India General Regulations, 1949 and are based on historical cost, except where it is modified to reflect revaluation.

The accounting practices and policies followed in the statements are consistent with those followed in the previous year, unless otherwise stated.

2. REVENUE RECOGNITION

Income and expenditure are recognised on accrual basis except penal interest and dividend, which are accounted for on receipt basis. Only realised gains are recognised. Provision for outstanding expenditure is made for unpaid bills in respect of cases of Rs.1 lakh and above.

Balances unclaimed and outstanding for more than three consecutive years in certain transitory accounts including Drafts Payable Account, Payment Orders Account, Sundry Deposits Account, Remittance Clearance Account and Earnest Money Deposit Account are reviewed and written back to the Reserve Bank’s income. Claims in this respect are considered and charged against the Reserve Bank’s income as and when paid.

Income and expenditure in foreign currency are recorded at the exchange rates prevailing on the last business day of the preceding week.

3. GOLD AND FOREIGN CURRENCY ASSETS AND LIABILITIES

Gold is valued at the end of the month at 90 per cent of the daily average price quoted at London for the month. The rupee equivalent is determined on the basis of exchange rate prevailing on the last business day of the month. Unrealised gains/ losses are adjusted to the Currency and Gold Revaluation Account (CGRA).

All foreign currency assets and liabilities are translated at the exchange rates prevailing on the last business day of the week and also on the last business day of the month.

At the year–end, assets and liabilities in foreign currencies are translated at the exchange rates prevailing on the last business day except in cases where rates are contractually fixed. Foreign securities other than Treasury Bills are valued at lower of book value or market price prevailing on the last business day of each month. The depreciation is adjusted against current income. Foreign Treasury Bills are valued at cost. Forward exchange contracts are evaluated half–yearly and net loss, if any, is provided for.

Profit/ loss on sale of foreign currency assets is recognised with respect to the book value. Exchange gains and losses arising from translation of foreign currency assets and liabilities are accounted for in Currency and Gold Revaluation Account and remain adjusted therein.

4. RUPEE SECURITIES

Rupee securities, other than Treasury Bills, held in the Issue and Banking Departments, are valued at lower of book value or market price. Where the market price for such securities is not available, the rates are derived based on the yield curve prevailing on the last business day of the month. The depreciation in the value, if any is adjusted against current Interest income.

Treasury Bills are valued at cost.

5. SHARES

Investments in shares are valued at cost.

6. FIXED ASSETS

Fixed Assets are stated at cost less depreciation.

Depreciation on computers (including software costing Rs.1 Lakh and above), motor vehicles, office equipments, furniture and electrical fittings, etc., is provided on straight–line basis.

Depreciation on other assets including premises and fixtures is provided on written–down value basis.

Software costing less than Rs.1 lakh and other Fixed Assets costing less than Rs.10,000 are charged to Profit/ Loss account in the year of acquisition.

Depreciation is provided on year end balances of the Fixed Assets.

7. RETIREMENT BENEFITS

The liability on account of retirement benefits and leave encashment to employees is provided based on an actuarial valuation.

8. CONTINGENCY RESERVE AND ASSET DEVELOPMENT RESERVE

Contingency Reserve represents the amount set aside on a year–to–year basis for meeting unexpected and unforeseen contingencies including depreciation in value of securities, exchange guarantees and risks arising out of monetary/ exchange rate policy compulsions.

In order to meet the internal capital expenditure and make investments in subsidiaries and associate institutions, a further specified sum is provided and credited to the Asset Development Reserve.

1. SURPLUS TRANSFER TO GOVERNMENT OF INDIA

Surplus transferable to the Government includes Rs.2,494.00 crore representing interest differential pertaining to the period April 1, 2004 – March 31, 2005 on account of conversion of Special Securities into marketable securities.

2. CHANGES IN ACCOUNTING POLICIES AND PROCEDURES

2.1 Reserve Bank has changed its policy relating to depreciation on Fixed Assets, which was hitherto being charged only if the asset was held for more than six months as at the year end, is now being charged on all Fixed Assets acquired during the year. Further, Expenditure incurred on software, which was hitherto being treated as revenue expenditure is now being capitalised for all individual software costing Rs. one lakh and above and depreciation is charged over a period of three years.

The net impact of the aforesaid change has resulted in additional depreciation of Rs.18.15 crore during the year.

2.2 During the year, Reserve Bank has earmarked certain Government securities from its Investments Account in order to cover the liabilities in Provident Fund, Superannuation Fund and encashment of ordinary leave, details thereof are as under:

3. RESERVE FUND

Reserve Fund comprises initial contribution of Rs.5 crore made by the Government of India and appreciation of Rs.6,495 crore on account of revaluation of Gold up to October 1990. Subsequent gains/ losses on monthly revaluation of Gold are taken to Currency and Gold Revaluation Account (CGRA).

4. DEPOSITS

4.1 Deposits of Central Government includes Rs.71,680.65 crore (previous year Rs.37,812.01 crore) on account of operations under Market Stablisation Scheme (MSS).

4.2 Details of Deposits – Others:

6. RBI GENERAL ACCOUNT

Other Liabilities includes Rs.999.65 crore (previous year Rs.517.39 crore) in respect of inter–office transactions and balances under reconciliation, which is at various stages of reconciliation and necessary adjustments are effected, as and when ascertained.

7. RUPEE INVESTMENTS

Securities sold (Reverse Repos) and purchased (Repo) under Liquidity Adjustment Facility (LAF) are reduced/ added from ‘Investments’. As at the year end, the outstanding Reverse Repos amounted to Rs.6,470 crore and Repos amounted to Rs.575 crore. There was no depreciation on the securities sold under LAF as at the year end.

Interest, Discount, Exchange, Commission, etc. include the following:

Establishment expenditure includes Rs.228.06 crore appropriation towards gratuily and superannuation fund as per actuarial valuation (previous year Rs.1,010 crore including additional provision on account of optional early retirement scheme).