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Recently, the Central Board of the Reserve Bank of India (RBI) approved a Rs. 2.11 lakh crore surplus or dividend transfer to the Central Government for the accounting year 2023-24. There has been an increase in surplus transfer to the tune of 141% over the last year’s (2022-23) dividend transfer of Rs 87,416 crore. Additionally, the contingency risk buffer has been raised to 6.5% from the previous 6%.
What is the source of RBI surplus? What is the mechanism for transfer of surplus by RBI?
The RBI has a unique operational nature, which stands apart from typical banks or financial entities.
| Sources of Earnings of RBI | Expenditures of RBI |
| 1. Profits derived from foreign currency assets like bonds, treasury bills and central bank deposits. 2. Earnings from local, rupee-based government securities. 3. Short-term based lending 4. Borrowing management for both central and state governments 5. Regulation of banks and non-banking financial bodies. 6. Commission from overseeing government transactions and specific underwriting endeavours. | 1. Operating Expenses 2. Currency Printing 3. Staff remunerations 4. Transaction commissions for Banks 5. Dealer Compensations 6. Interest Paid on Deposits and Borrowings |
Surplus- Net income derived from the total income (sources of income) minus total expenditure (expenses). Out of the Surplus of RBI, risk provisioning is made for monetary and financial stability risks, and credit and operational Risks.
Transfer of Surplus- RBI transfers its surplus to the government as per Section 47 of the Reserve Bank of India Act, 1934.
The surplus calculation is based on the Economic Capital Framework (ECF) recommended by the Bimal Jalan committee. The c, advised the RBI to maintain a Contingent Risk Buffer (CRB) between 5.5% and 6.5% of its balance sheet.
| Read More- Economic Capital Framework |
What are the reasons behind Increase in RBI surplus?
1. High profits from US treasury Bonds- According to data from the US Department of the Treasury, as of March 31, 2024, the RBI has invested $240.6 billion in US Treasuries. The high yields on these bonds, due to monetary policy tightening, have resulted in substantial interest income for the RBI from foreign assets.
2. Surge in Forex Holdings of RBI- The sharp jump in the surplus amount can also be attributed to higher income from the forex holdings of the central bank. For ex- In FY24, the RBI’s foreign exchange (forex) reserves surged by $68 billion, which is the highest in five years.
3. Higher earnings from interest- The shifting of domestic liquidity into deficit mode has contributed to the central bank’s higher income. When liquidity enters deficit, the RBI lends to banks, earning interest.
4. Increase in Gold Prices- The increase in the price of gold has also added to the overall expansion of the RBI balance sheet.
5. Intervention in forex market- RBI’s intervention in the forex market has contributed to the higher incomes. For ex- RBI sold securities worth $153 bn in the forex market in FY 24.
What is the significance of the record RBI Surplus transfer to the Government?
The record RBI surplus transfer of Rs. 2.11 lakh crore has provided fiscal boost to the government. This surplus is significant for the following reasons
1. Increased Capital Expenditure (CAPEX)- The surplus transfer provides much needed fiscal stimulus to the government to increase its allocations to roads, railways, and defence projects.
2. Reduced borrowing and Fiscal Consolidation- The stimulus transfer provides the government with a fiscal space of 0.3% of GDP. This would help in reducing the borrowing and maintaining fiscal discipline. It would ensure fiscal deficit reduction remains in sync with the committed glide path of 4.5% by FY26.
3. Boost to Bond markets- The government has raised hopes among the bond traders, as it would lead to correction in the yield of government securities.
4. Meeting the revenue shortfall- The latest dividend payout from the RBI will be instrumental in compensating for any slippages in tax revenue.
5. Covering the disinvestment target- The Govt has set an ambitious divestment target of ₹50,000 crore for FY25. It is about 67% higher than the revised target for FY24. However, the govt has missed the target for the past few years. The surplus provides a safety revenue cover to the government in case of any potential miss this year.
What Should be the Way Forward?
1. Absorption of excessive liquidity- RBI must absorb the excessive liquidity generated by the surplus transfer by undertaking open market operation sales and foreign exchange interventions.
2. Increasing Govt tax-GDP Ratio- The government must not constantly depend upon transfers from the central bank or dividend from public-sector enterprises. Proper fiscal management must be undertaken to increase the government’s tax-to-GDP ratio.
3. Rationalisation of GST rates- The government must immediately initiate work on rationalising the rates and slabs of GST in the GST Council to increase government’s tax revenues.
4. Disinvestment in public sector- The government must aim to fast track the disinvestment plan of the public sector to meet any revenue shortfall in future.
The immediate effect of the RBI transfer will be to simplify the fiscal maths for the Ministry of Finance. However, the longer-term priorities of the RBI will remain the same.
| Read More- The Indian Express UPSC Syllabus- GS 3- Indian Economy |
