RBI Surplus Transfer

Context:

India’s banking system is expected to see surplus liquidity rise to ₹5.5–6 lakh crore in the coming weeks, following a substantial dividend payout by the Reserve Bank of India (RBI) to the Central Government. This is likely to exert downward pressure on short-term interest rates, influencing bond markets and monetary policy outlook.

How the RBI Determines the Allocation of Dividends

The Reserve Bank of India (RBI) determines its annual dividend transfer to the Government of India based on the Economic Capital Framework (ECF). This framework balances fiscal support to the government with the need to maintain adequate financial buffers for monetary and financial stability.

Under Which Section RBI Transfers It’s Surplus To Central Government?

• Section 47, RBI Act, 1934: RBI must transfer surplus to the Central
  Government after risk provisions.
• Section 48: RBI is exempt from income and super tax.
• Section 49 deals with the publication of the bank rate.
• Section 50 outlines the provisions regarding the National Housing Credit
  (Long Term Operations) Fund.

Key Determinants of Dividend Allocation

Economic Capital Framework (ECF)

• Based on recommendations by the Bimal Jalan Committee (2018).
• RBI must maintain a Contingent Risk Buffer (CRB) of 5.5%–6.5% of its balance sheet.
• CRB covers risks such as:
  • Market volatility
  • Credit defaults
  • Operational and financial system disruptions

Dividend Calculation Process

• Surplus = Total income – Total expenditure – CRB provisioning
• Only the remaining surplus, after provisioning, is transferred to the Government of India under Section 47 of the RBI Act, 1934.

Sources of RBI’s Income

Recent Trends

• As of March 2024:
  • Forex reserves: USD 646 billion (with USD 409 billion in top-rated sovereign assets)
  • Lower dollar sales in FY24 (USD 153 bn) than FY23 (USD 213 bn), yet income remained strong
  • LAF operations significantly boosted earnings

Expenditure Components

TOI