Key Facts about the Surplus Transfer
Record Dividend Payout: In May 2024, the Reserve Bank of India (RBI)’s Central Board approved a surplus transfer of ₹2.11 lakh crore (₹2.11 trillion) to the Government of India for the fiscal year 2023-24. This is the highest-ever annual transfer by the RBI, approximately 140% higher than the previous year’s dividend (₹87,416 crore for FY23).
Comparison with Past Transfers: The FY24 surplus far exceeds what the government had budgeted (around ₹1.02–1.05 lakh crore from RBI & financial institutions). It also surpassed the earlier record transfer of ₹1.76 lakh crore (in FY 2018-19, which included a one-time reserves release).
Date and Context: The RBI’s 608th Central Board meeting (held in May 2024 under Governor Shaktikanta Das) reviewed the FY24 operations and approved the dividend on May 22, 2024. The transferable surplus was calculated using the RBI’s revised Economic Capital Framework (ECF), which determines how much profit can be paid to the government after retaining necessary reserves.
Contingency Buffer Raised: Alongside declaring the surplus, the RBI Board decided to increase the Contingency Risk Buffer (CRB) to 6.5% (from 6.0%) of its balance sheet for FY24. This ensured that despite the large payout, the RBI’s financial reserves were kept at the upper safe limit recommended by experts.
About the Reserve Bank of India (RBI)
Central Bank & Statutory Status: The RBI is the central bank of India, established on April 1, 1935 under the Reserve Bank of India Act, 1934. It is a statutory body (not a constitutional body) created by an Act of Parliament. (The RBI was originally set up as a shareholders’ bank and later nationalized in 1949, making the Government of India its owner.)
Key Functions: As India’s central bank, the RBI regulates the issuance and supply of the Indian rupee, manages monetary policy, and acts as banker to the central government and to banks. It also oversees financial stability and the banking system. These functions generate income for the RBI – e.g. interest on government securities, open market operations, foreign asset earnings, and lending to banks – and after covering operating expenses, the remaining profit constitutes the RBI’s surplus.
Surplus Transfer Role: The RBI’s surplus (profit) is periodically transferred to the Government of India, effectively as a dividend to the government (the RBI’s shareholder). This transfer helps augment the government’s finances and is a form of non-tax revenue in the Union Budget. It is typically done annually after the RBI finalizes its accounts for the year.
Legal Provision – Section 47 of the RBI Act, 1934
Mandate to Transfer Profits: Section 47 of the Reserve Bank of India Act, 1934 is the key legal provision governing the RBI’s surplus. It requires the RBI to pay the balance of its profits to the central government after making provisions for bad and doubtful debts, depreciation of assets, and other specified liabilities (e.g. employee pensions). In essence, all of RBI’s net profits (after such provisions) belong to the Government of India as per law.
Dividend to Government: This statutory mandate under Section 47 is why the RBI cannot indefinitely retain profits beyond required provisions. Each year’s “excess of income over expenditure” (surplus), after ensuring adequate contingency reserves, must be transferred to the Government. The provision enshrines the principle that the nation’s central bank returns its profits to the public exchequer, barring amounts needed for operational and contingency purposes.
Contingency Risk Buffer (CRB)
What is the CRB? The Contingency Risk Buffer (CRB) is the portion of RBI’s capital set aside as a safety cushion for unforeseen risks. It is essentially the RBI’s “rainy day” fund for financial emergencies, aimed at ensuring stability during crises. The CRB (also referred to as the contingency fund or realized equity) covers risks such as market losses (due to exchange rate or interest rate fluctuations), credit defaults, operational risks, and any monetary or financial stability contingencies. This buffer is critical given the RBI’s role as Lender of Last Resort (LoLR) to the financial system.
Significance: Maintaining an adequate CRB is vital for the RBI’s financial resilience. A higher CRB means the RBI has more provisions to absorb potential losses, protecting its balance sheet and enabling it to support the economy during shocks. However, retaining more funds as CRB reduces the surplus available to transfer to the government in the short term. The RBI’s goal is to strike a balance – keeping sufficient buffers for stability while remitting the remaining profit to the government for fiscal use.
Current Level: The Bimal Jalan Committee’s framework (2019) prescribed that the CRB should be maintained between 5.5% and 6.5% of the RBI’s balance sheet. In the past, during stressed periods (e.g. 2018-2021 and the COVID-19 shock), the RBI kept CRB at the lower end (around 5.5%) to allow larger transfers. With economic recovery, the CRB was raised to 6.0% in FY23 and further to 6.5% in FY24 (the upper limit of the recommended range). As of March 31, 2024, the RBI’s CRB stands at 6.5% of its assets, providing a robust buffer while enabling the record surplus transfer.
Bimal Jalan Committee – Role and Recommendations
Formation: In 2018, the RBI (in consultation with the Government) set up an expert committee chaired by Dr. Bimal Jalan (a former RBI Governor) to review the bank’s Economic Capital Framework (ECF).
Key Recommendations (2019):
Contingency Buffer Range: RBI’s realized equity (contingency reserve) should be maintained between 5.5% to 6.5% of the balance sheet. Any excess over the upper limit could be transferred to the government.
Economic Capital Composition: The RBI’s capital was split into “Realized equity” (tangible reserves) and “Revaluation balances” (unrealized gains). Surplus distribution should be based only on realized profits.
Surplus Distribution Policy: Surplus is transferred to the government only after provisioning for the CRB within the specified range.
Periodic Review: The ECF is reviewed every 5 years. The next review was due around 2024, and the RBI has initiated a fresh review.
Implications for the Union Budget and Macroeconomy
Boost to Government Revenue: The record ₹2.11 lakh crore dividend for FY24 is a significant non-tax revenue inflow for FY25, helping to bridge revenue shortfalls without increasing borrowing.
Fiscal Deficit and Borrowing: A higher RBI dividend can effectively reduce the fiscal deficit if used to substitute debt. It allows the government to reduce market borrowings, easing pressure on bond yields.
Spending and Liquidity: The RBI’s surplus, when spent by the government, injects liquidity into the economy, potentially supporting economic growth.
Macro-Economic Significance: While beneficial in the short term, RBI transfers vary depending on economic conditions. The CRB safeguards the RBI’s financial health, ensuring long-term macroeconomic stability by balancing surplus transfers with necessary reserves.
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