Where does the RBI’s surplus come from? | Explained-OxBig News Network

The story up to now: Putting an finish to a lot hypothesis, the Reserve Bank of India’s Central Board on Friday (May 23, 2025) introduced that it had decided to transfer ₹2.69 lakh crore to the Central government as a surplus for the 12 months 2024-25. This is a report excessive switch, 27% greater than the ₹2.11 lakh crore transferred the earlier 12 months, which itself was a report on the time.

What had the federal government budgeted for?

This ₹2.69 lakh crore can be greater than what the federal government itself budgeted — ₹2.56 lakh crore — as dividend or surplus from the RBI, and the general public sector banks and insurance coverage firms. With the RBI’s share itself exceeding this quantity, this implies the federal government’s whole collections from this class is prone to be far in extra of what it budgeted.

However, issues haven’t at all times been really easy for the federal government in relation to the RBI’s surplus. There have been sturdy arguments on each side up to now on what needs to be completed with the excess the RBI earns, together with some reportedly caustic remarks by Prime Minister Narendra Modi himself.

Where does the RBI get its surplus?

Before moving into the previous controversy, it’s essential to first perceive how the RBI earns cash, and in addition why what it transfers to the federal government isn’t known as a ‘dividend’. The RBI just isn’t an organization within the conventional sense with shareholders, and so it can’t difficulty dividends.

But it’s a ‘full-service’ central financial institution, that means that not solely does it goal inflation, difficulty foreign money, and regulate the banking sector, it’s also the final resort lender to the federal government of India and the varied State governments.

The RBI can earn vital income from a few of these features. For instance, the method of issuing foreign money permits for the RBI to earn one thing known as seigniorage. Seigniorage is principally the distinction between the face worth of a foreign money and the associated fee it took to supply that foreign money. When the RBI points foreign money, say, a ₹500 word, the industrial banks should ‘buy’ these notes from the central financial institution on the full face worth (on this case, ₹500) though it might need price a fraction of that to truly produce that word.

This counts in the direction of the RBI’s income. Then, the central financial institution additionally lends cash to the Central authorities, State governments, and industrial banks with curiosity. This curiosity, too, provides to the RBI’s income. Third, the RBI makes investments in different international locations’ bonds as effectively, not solely incomes curiosity on these, but in addition doubtlessly benefiting from foreign money change price fluctuations.

According to the Reserve Bank of India Act, 1934, after the RBI has made provisions for dangerous and uncertain debt and has met all its bills, together with any provisions it must make in the direction of buffer funds, “the balance of the profits shall be paid to the Central Government”.

The debate, thus, is on the scale of the buffer the RBI ought to preserve.

What type of buffer ranges does the RBI preserve?

The fundamental buffer fund the RBI maintains is known as the Contingent Risk Buffer (CRB), which is principally a security web within the occasion of a monetary stability disaster.

In 2018, a committee was arrange underneath the chairmanship of former RBI governor Bimal Jalan to find out the RBI’s Economic Capital Framework (ECF), together with how massive the CRB needs to be. At the time, the committee really helpful that the CRB needs to be within the vary of 5.5-6.5% of the RBI’s steadiness sheet. This was adopted by the RBI in 2019.

The Jalan committee additionally really helpful that the ECF be reviewed each 5 years, which is what the RBI’s central board simply accomplished doing. The central board determined that the CRB vary can be widened to 4.5-7.5% from 2024-25 onwards.

During 2018-19 to 2021-22, the RBI saved the CRB at 5.5% of its steadiness sheet, as a result of COVID-19 pandemic and its affect on the economic system. This was then hiked to six% in 2022-23 and 6.5% (the utmost restrict on the time) in 2023-24. For 2024-25, the RBI board has determined to maintain the CRB on the new highest restrict of seven.5% of the central financial institution’s steadiness sheet.

The income of the central financial institution have been such that — regardless of this greater provisioning — it may nonetheless handle to switch a report ₹2.69 lakh crore to the Central authorities.

Have these transfers occurred up to now with out controversy?

In brief, no. While the excess transfers haven’t been the only real cause for acrimony between the RBI and the Ministry of Finance, it has actually performed a big half.

Take, for instance, the assertion by then RBI Deputy Governor Viral Acharya in 2018 through which he lamented that the RBI was “neither an independent nor an autonomous institution” and that governments that don’t respect the central financial institution’s independence will “come to rue the day they undermined an important regulatory institution”.

It was by no means formally clarified what this was about, however reporters protecting the beat on the time knew a big half was in regards to the authorities demanding giant transfers of surpluses, and the RBI resisting.

Then, there’s the explosive passage in former Finance Secretary Subhash Chandra Garg’s ebook We Also Make Policy, through which he recounts that — throughout a gathering with then RBI governor Urjit Patel in September 2018 — PM Modi informed Mr. Patel that he was like a “snake who sits over a hoard of money”.

Both Mr. Acharya and Mr. Patel resigned quickly after their disagreements with the federal government. The matter subsequently died down, particularly as soon as the Jalan committee system was adopted.

Are such giant transfers the brand new regular?

The greater switch this 12 months was on account of upper overseas change gross sales by the RBI, greater earnings on its overseas change property and from its liquidity administration instruments.

As Madan Sabnavis, chief economist on the Bank of Baroda, famous, the RBI’s overseas change gross sales — a big driver of income — will not be on the identical degree subsequent 12 months.

However, however, the RBI has additionally now supplied itself a wider band for the CRB. So, if subsequent 12 months it decides to maintain it on the decrease finish of 4.5%, then it may have a bigger quantity left over to ship to the federal government.