RBI’s Surplus Transfer

Disclaimer: Copyright infringement not intended.

Context

• The Reserve Bank of India's (RBI) Central Board of Directors has agreed to transfer of Rs 2.11 lakh crores as surplus to the government for the financial year 2023-24.

Background

• Every year, the RBI transfers a certain amount to the central government through the surplus income it generates from investments, fluctuations in the valuation of its dollar reserves, and revenue earned from currency printing fees.
• Last fiscal year, the central bank had given Rs 87,416 crore to the Centre as surplus.
• But this year's amount is somewhat the biggest and 141% more than FY23.

How does the RBI, as India's central banking institution, generate profit?

• The RBI, serving as India's central banking pillar, boasts a multifaceted framework for profit generation.
• Central to its earnings are:
• Borrowing management for both central and state governments.
• Regulation of banks and non-banking financial bodies.
• Profits derived from foreign currency assets like bonds, treasury bills, and central bank deposits.
• Earnings from local, rupee-based government securities and short-term bank lending.
• Commission from overseeing government transactions and specific underwriting endeavours.

RBI’s Expenditures

• Substantial expenditures, including currency printing, staff remunerations, transaction commissions for banks, and dealer compensations, need to be addressed.
• Before marking its profit, the RBI makes rigorous provisions for potential financial pitfalls such as bad loans, asset wear and tear, staff benefits, and other statutory obligations.
• The profit, distilled from this process, is then transferred to the central government.
• Factors like investments, dollar holding valuation dynamics, currency printing fees, and rupee depreciation influence the RBI's surplus income.

How do the transfer mechanics work?

• The RBI's inception in 1935 saw it as a private entity with shareholders and a modest Rs. 5 crore in capital.
• A transformational shift in 1949 led to its nationalisation, making the government its principal stakeholder.
• This structural change means that instead of typical dividends, the RBI channels its net income to the government, rooted in Section 47 of the Reserve Bank of India Act, 1934.
• This surplus transfer is essentially the residue post various financial provisions.
• Guidelines suggest that the RBI should maintain a Contingent Risk Buffer, primarily sourced from the Contingency Fund (CF), amounting to 5.5-6.5 percent of its balance sheet.
• Amounts exceeding this threshold are viewed as surplus, eligible for government transfer.
• On the front of the RBI’s economic capital levels — which is essentially the CGRA, the committee recommended keeping them in the range of 20-24.5 percent with the surplus channelled to the Centre.

What is the global perspective?

• Surplus transfers aren't unique to India. However, the approach varies.
• While countries like the UK and the US have the central bank and government jointly decide the surplus distribution, in Japan, the government takes the lead. On average, these transfers hover around 0.5 percent of the GDP.
• In essence, the RBI's surplus transfer isn't just a financial transaction. It's a testament to the institution's role in economic stability and a window into the dynamic relationship between the central bank and the government.

SOURCE: INDIAN EXPRESS

PRACTICE QUESTION Q. Consider the following statements regarding the Reserve Bank of India (RBI): 1.According to Section 47 of the Reserve Bank of India Act, 1934, the RBI channels its net income to the government as dividends. 2.The Contingent Risk Buffer maintained by the RBI should be between 5.5-6.5 percent of its balance sheet, with amounts exceeding this threshold considered surplus for transfer to the government. 3.RBI’s surplus transfers are unique to India. Which of the statements given above are correct? a) 1 and 2 only b) 2 only c) 1, 2 and 3 d) 1 and 3 only Answer b) 2 only Statements 1 and 3 are incorrect. Explanation: Statement 1 is incorrect. According to Section 47 of the Reserve Bank of India Act, 1934, the RBI channels its net income to the government, but this is not referred to as dividends. Statement 2 is correct. The guidelines suggest that the RBI should maintain a Contingent Risk Buffer of 5.5-6.5 percent of its balance sheet, with amounts exceeding this threshold considered surplus and eligible for transfer to the government. Statement 3 is incorrect:  Surplus transfers aren't unique to India. However, the approach varies. While countries like the UK and the US have the central bank and government jointly decide the surplus distribution, in Japan, the government takes the lead. On average, these transfers hover around 0.5 percent of the GDP.