WHERE DOES THE RBI’S SURPLUS COME FROM?

THE CONTEXT: When the Reserve Bank of India (RBI) prints money or earns interest on the foreign securities it holds, it makes a profit. After keeping aside a safety-cushion called the Contingent Risk Buffer (CRB) to face future crises, the leftover amount is handed to the Union Government. The latest hand-over is a record ₹ 2.69 lakh crore for 2024-25, comfortably beating the Budget estimate of ₹ 2.56 lakh crore.

NOTE: The Bimal Jalan Committee (2019) had earlier fixed the CRB band at 5.5–6.5 % of the balance-sheet. The five-yearly review concluded in May-2025 has widened the band to 4.5–7.5 %, giving the Board more flexibility.

HOW DOES THE RBI EARN?

1. Seigniorage – difference between the face value of a note and its printing cost.

2. Interest on domestic lending – Ways-and-Means Advances to Union and State Governments.

3. Interest, dividend & trading gains on foreign assets – US Treasury bonds, gold, swaps; gains rise when the rupee depreciates.

4. Fee income & penalties – regulation of banks and payment systems.

5. Valuation gains – marked to market but parked in revaluation accounts, not distributable.

Together, these flow into the Income Statement; after expenditure and CRB appropriation, the remainder becomes “surplus” under Section 47 of the RBI Act 1934.

CURRENT SCENARIO — WHY SUCH A BUMPER PAYOUT?

• • Record foreign-exchange intervention during 2024-25 generated realised trading gains.
  • Higher global interest rates lifted coupon income on the RBI’s G-Sec and US-Treasury portfolio.
  • Contained domestic open-market-operation (OMO) losses because durable liquidity was largely in surplus, minimising sterilisation cost.
  • Tight cost control — staff and printing expenses have risen only ~3 % year-on-year.

SIGNIFICANCE FOR FISCAL MANAGEMENT

• • Adds ~0.2 % of GDP fiscal space, helping the Budget target a 4.4 % fiscal deficit in 2025-26 without fresh borrowing.
  • Supplies rupee liquidity to the banking system; short-term money-market rates soften, lowering the government’s interest outgo on T-Bills.
  • Offsets lower-than-expected proceeds from disinvestment and spectrum auctions

GLOBAL PERSPECTIVE

India’s approach of retaining a sizeable CRB and not indemnifying the RBI looks prudent and internationally comparable.

THE ISSUES:

• • Fiscal-dominance risk: The record ₹ 2.69 lakh-crore surplus equals 0.20 % of GDP and single-handedly covers nearly ¾ of the Budget’s net tax-to-GDP slippage in FY 2025-26. Easy windfalls can postpone hard reforms, such as widening the Goods and Services Tax (GST) base or pruning non-merit subsidies, thereby weakening the Fiscal Responsibility and Budget Management (FRBM) glide path.

• • Historical echo: During 1997-98, large RBI ad-hoc Treasury-bill monetisation eased the fiscal crunch but stoked double-digit inflation—classic fiscal dominance.

• • Thin-line autonomy: The 2018 resignations of Governor Urjit Patel and Deputy Governor Viral Acharya followed government demands for higher transfers, highlighting reputational risk. The Jalan Committee provided a five-year rule-book, but each quinquennial review, like the May 2025 one that widened the CRB band to 4.5–7.5 %, invites lobbying for “optimal” surpluses.
  • Accounting opacity: Unrealised revaluation gains on gold and foreign securities now exceed ₹ 11 lakh crore—almost 50 % of the RBI balance-sheet—but their release rules remain opaque and IFRS-style fair-value disclosures are pending. The United States Federal Reserve openly reports operating losses by booking a “deferred asset” and halting remittances—a disclosure template India lacks.
  • Growing balance-sheet risk: Foreign-asset sales of US $ 34.5 billion in FY 25—the highest since 2008—boosted profit but shrank the FX-asset cushion; meanwhile, domestic G-Sec holdings have lengthened duration, raising interest-rate-risk. US Treasury assets (≈60 % of RBI’s FX book) are exposed to sanctions or rating-downgrades—lessons from Russian reserve freezes urge diversification into SDR-denominated or supranational debt.
  • Sterilisation cost shifting: Heavy FX intervention forced the RBI to inject ₹8.57 trillion via variable-rate repos by May 2025; taxpayers bear the quasi-fiscal cost of absorbing that liquidity, yet it appears as a higher RBI profit—a hidden subsidy. Academic work estimates that the RBI sterilises ≈approximately 93% of intervention flows, but every rupee sterilised earns the banking system an interest spread, effectively socialising costs.

THE WAY FORWARD:

• • Legislate the Economic Capital Framework into the Reserve Bank of India Act and mandate fresh Parliamentary approval every five years. This statutory anchor will immunise the Framework against ad-hoc executive pressures and honour the original recommendation of the Bimal Jalan Committee of 2019. A Finance Bill amendment with a sunset‐review clause can operationalise the change and bolster the Reserve Bank of India’s (RBI’s) de jure independence.
  • Set up an Economic-Shock Stabilisation Fund inside the Consolidated Fund of India to warehouse “windfall” RBI transfers. Mirroring Chile’s Economic and Social Stabilisation Fund, the corpus would release money only when the output gap turns negative or a national disaster is declared, thereby smoothing the fiscal cycle. Automatic inflows and outflows, disclosed through the Union Budget, will enhance transparency and macro-stability.
  • Legally cap the use of RBI surplus for revenue expenditure and earmark at least half for capital formation. Such ring-fencing aligns with the Fiscal Responsibility and Budget Management Act’s long-stated emphasis on productive spending. Compliance could be certified ex-post by the Comptroller and Auditor General of India.
  • Adopt International Financial Reporting Standards for central-bank accounting by 2028 after broad stakeholder consultation. Convergence will improve comparability, clarify the treatment of unrealised valuation gains, and raise investor confidence, as evidenced by similar moves in Paraguay and guidance issued by the International Monetary Fund. A task-force headed by the Comptroller and Auditor General can draft the migration roadmap and oversee phased implementation.
  • Constitute a Monetary-Fiscal Coordination Council chaired by the Union Finance Minister and the RBI Governor, with minutes tabled in Parliament each quarter. The forum will facilitate rule-based dialogue on liquidity management, debt issuance, and contingency planning without compromising operational autonomy. Its design draws on recent academic work that identifies structured coordination as a safeguard against both fiscal and monetary dominance.
  • Embed climate-risk provisioning within the Contingent Risk Buffer formula and require the RBI to publish an annual climate stress-test report. “Green-swan” events can wipe out bank capital faster than traditional shocks, a point underlined by the Bank of England’s evolving climate-risk framework; proactive provisioning will future-proof the RBI balance sheet. The approach aligns with India’s commitments under the Paris Agreement and maintains the financial system’s alignment with the Sustainable Development Goals.

THE CONCLUSION:

The 2025 payout is undeniably good news for the exchequer, yet it must be treated as windfall, not windpipe. Embedding a transparent, rules-based Economic Capital Framework, channelling surpluses into long-term public goods, and safeguarding the RBI’s hard-won autonomy will convert today’s fiscal bonanza into tomorrow’s macro-economic resilience.

UPSC PAST YEAR QUESTION:

Q. What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation. 2024

MAINS PRACTICE QUESTION:

Q. The surplus transfer by the Reserve Bank of India revives the old debate on the optimal size of the Contingent Risk Buffer and the autonomy of monetary authorities. Discuss the risks of fiscal dependence on such transfers.

SOURCE:

https://www.thehindu.com/business/Economy/where-does-the-rbis-surplus-come-from-explained/article69615246.ece