RBI’s ₹2.7 trillion: Many benefits arise from one big beautiful surplus
The record transfer of Reserve Bank of India’s surplus to the Centre, despite an enlarged contingency buffer, strikes a fine balance between caution and heedfulness. It strengthens RBI as well as the government’s fiscal position. That’s good news for the economy.
On Friday last, the Reserve Bank of India (RBI) announced its decision to transfer a record surplus of nearly ₹2.7 trillion for 2024-25 to the Indian government’s coffers. The sum of ₹2,68,590.07 crore transferred is loosely referred to as the central bank’s ‘annual dividend,’ but since it is not a commerce entity, this is actually the ‘surplus’ of its income over expenditure.
It is 27% higher than the previous year’s figure, despite an enlarged contingency risk buffer (CRB), as stipulated by the revised Economic Capital Framework (ECF) approved by RBI’s Central Board. As against a CRB of 5.5-6.5% laid down by a panel led by former governor Bimal Jalan half a decade ago, the range has been widened to 4.5-7.5% of RBI’s balance sheet.
Rightly so.
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That RBI was in the process of reviewing the ECF was known, but few may have expected the upper end to be raised. The CRB comprises three sub-buffers; while the norms were kept steady for credit risk and operational risk, the central bank’s buffer for monetary and financial risk was reset at 3.5-6.5% from 4.5%-5.5% earlier.
This is entirely in keeping with the principles of prudent central banking. The CRB, as the name suggests, is meant to take care of contingencies. So, from 2018-19 to 2021-22, a period that included an economic slowdown even before the pandemic disruption, RBI maintained its CRB at the 5.5% lower bound as part of its effort to support India’s economy. It was upped to 6% for 2022-23 and further to 6.5% for 2023-24. And now, based on its assessment of “macroeconomic conditions and other factors affecting the balance sheet of RBI," it has been raised to 7.5% for 2024-25.
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A detailed analysis of RBI’s income, expenditure and sources of surplus will have to await publication of its Annual Report for 2024-25. But it is fair to surmise that, as in the past, the bulk of its earnings last year came from its foreign exchange transactions in support of the rupee.
The balance is likely to be from earnings on its holdings of foreign and domestic securities; in the latter case, as a result of open market operations to infuse liquidity into the banking system, which RBI did by buying bonds in cash from banks.
The sale of dollars to prop the rupee’s rate of exchange turned a ‘profit’ for it since the dollars sold during the year were acquired earlier at a much lower price. Some back-of-the-envelope math suggests that every dollar sold may have fetched RBI close to ₹6. Given the enlarged scale of its forex operations last fiscal year, its gains would have been substantial.
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But there is a flip side to this. Given that RBI payouts of such magnitude typically spring from heavy intervention on the rupee’s behalf, there’s a risk that the other side of the trade-off could get short shrift; a rupee that’s too strong dulls the pricing edge of our exports, as the landed prices of Indian goods and services are higher overseas than they’d otherwise be.
How best to manage the rupee, though, is a complex question involving various macro variables, so this debate is unlikely to be settled easily. What’s doubtless is that the surplus transfer could help the Centre keep its fiscal deficit for 2025-26 within its 4.4%-of-GDP target in an economic scenario where slower growth could hurt its revenues. Both Mint Street and North Block have reason to be pleased with this mega surplus. With multiple benefits arising from it, it’s good for the Indian economy.
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