Why in News?

The RBI’s Central Board announced a record surplus transfer of ₹2.69 lakh crore to the Central government for 2024-25, marking a 27% increase over the previous year’s ₹2.11 lakh crore.

What’s in Today’s Article?

• Higher-than-Expected RBI Transfer
• Understanding the Nature of RBI’s Surplus
• The RBI’s Safety Net: Contingent Risk Buffer (CRB)
• Historical Tensions Over Surplus Transfers

Higher-than-Expected RBI Transfer

• The ₹2.69 lakh crore surplus transferred by the RBI exceeds the government’s budgeted estimate of ₹2.56 lakh crore from the RBI, public sector banks, and insurance firms combined.
• This implies that actual collections from this category will significantly surpass expectations.
• Unusually High Transfers in 2024–25
  • The record surplus transfer of ₹2.69 lakh crore was driven by increased foreign exchange sales, higher earnings from forex assets, and gains from liquidity management operations.
• Sustainability in Question
  • According to experts, such high levels of foreign exchange sales may not continue next year, potentially reducing profits.
• Room for Flexibility in Future Transfers
  • With the RBI widening the Contingent Risk Buffer (CRB) range to 4.5–7.5%, it has greater flexibility.
  • If it opts for a lower buffer (e.g., 4.5%) next year, it could still transfer a substantial surplus to the government—even if revenues decline.

Understanding the Nature of RBI’s Surplus

• The RBI is not a company and has no shareholders, so it doesn’t pay dividends.
• Instead, it transfers surplus earnings to the Central government as mandated by the RBI Act, 1934.
  • As per the RBI Act, once expenses and required provisions for contingencies are met, the remaining profit is transferred to the Central government.
• Sources of RBI’s Revenue
  • Seigniorage: The RBI earns seigniorage — the difference between the face value of currency and its production cost — when commercial banks purchase currency notes at face value.
  • Lending Operations: The RBI lends to the Central and State governments, as well as commercial banks, and earns interest on these loans.
  • Foreign Investments: The RBI invests in foreign bonds, earning interest and sometimes gaining from currency exchange rate fluctuations.
• RBI’s Core Role: Economic Stability, Not Profit
  • RBI exists to maintain economic stability — keeping inflation in check, ensuring stable interest and exchange rates, managing currency, and serving as the banker to the government — not to earn profits.
  • While the RBI works for public good, its market operations can generate income.
    • These earnings, such as seigniorage and interest, arise as natural byproducts of fulfilling its mandate.
  • As the economy expands, the RBI’s operations and potential income also grow, reflecting its broader role in stabilizing financial systems.

The RBI’s Safety Net: Contingent Risk Buffer (CRB)

• The RBI maintains a CRB as a safeguard against potential financial stability crises.
• This buffer is part of the broader Economic Capital Framework (ECF).
• Jalan Committee Recommendations
  • In 2018, the Bimal Jalan committee recommended that the CRB should be maintained within a range of 5.5–6.5% of the RBI’s balance sheet.
  • This was adopted in 2019, along with a recommendation to review the ECF every five years.
• Recent Changes to the CRB Range
  • Following the latest review in 2024-25, the RBI’s Central Board widened the CRB range to 4.5–7.5%.
  • The buffer was gradually increased from 5.5% (2018–22) to 6% (2022–23), then 6.5% (2023–24), and now stands at 7.5%, the new upper limit.
• Record Surplus Despite Higher Buffer
  • Even after allocating a record-high 7.5% of its balance sheet to the CRB, the RBI still managed to transfer a record ₹2.69 lakh crore surplus to the Central government for 2024–25, reflecting robust profitability.

Historical Tensions Over Surplus Transfers

• Surplus transfers from the RBI to the government have often been a point of contention between the central bank and the Ministry of Finance.
• 2018 Flashpoint: Autonomy Under Strain
  • In 2018, then RBI Deputy Governor Viral Acharya strongly criticized the erosion of the RBI’s independence, hinting that government pressure for larger surplus transfers was a major cause of friction.
• Political Pressure and Resignations
  • Former Finance Secretary Subhash Chandra Garg, in his book We Also Make Policy, revealed that PM Modi likened RBI Governor Urjit Patel to a “snake sitting over a hoard of money” during a 2018 meeting, referring to the RBI’s reserves.
  • Soon after, both Patel and Acharya resigned due to ongoing disagreements.
• Cooling of Tensions Post-Jalan Formula
  • The conflict eventually subsided with the adoption of the Jalan Committee’s Economic Capital Framework, which formalized the process for determining surplus transfers and buffer levels.