Where does the surplus of the RBI come from? | Explained

The story so far: The Central Board of the Reserve Bank of India, on Friday (23 May 2025), announced that it had decided to transfer £ 2.69 Lakh Crore to the central government as a surplus for the year 2024-25. This is a record -high transfer, 27% higher than the £ 2.11 lakh crore transferred the previous year, which was a record itself.

What had the government budgeted for?

This £ 2.69 Lakh Crore is also higher than what the government itself budget – £ 2.56 Lakh Crore – as a dividend or surplus of the RBI, and the banks and insurance companies of the public sector. With the share of the RBI itself that this amount exceeds, this means that the total collections of the government from this category are probably much more than being what it is budgeted.

However, it has not always been so easy for the government when it comes to the surplus of the RBI. On both sides have been strong arguments in the past about what should be done with the surplus, the RBI earns, including some reporting biting comments from Prime Minister Narendra Modi himself.

Where does the RBI get its surplus?

Before it comes to controversy in the past, it is important to first understand how the RBI earns money, and also why it is not called a ‘dividend’ to the government. The RBI is not a company in a traditional sense with shareholders, and so it cannot spend dividends.

But it is a ‘full-service’ central bank, which means that it not only focuses on inflation, issuing currency and regulating the banking sector, it is also the last resort for the Indian government and the various state governments.

The RBI can produce considerable profit of some of these functions. For example, with the issue of currency, the RBI can earn something that is called signorage. Seigniorage is in fact the difference between the nominal value of a currency and the costs needed to produce that currency. When the RBI, for example a ticket of £ 500, publishes, the commercial banks must ‘buy’ these banknotes from the central bank at the full nominal value (in this case £ 500), although it might have cost a fraction to actually produce that ticket.

This counts for the income of the RBI. Subsequently, the Central Bank also grants money to the central government, national governments and commercial banks with interest. This interest also contributes to the income of the RBI. Thirdly, the RBI also makes investments in the bonds of other countries, not only interest on this, but also possibly benefit from currency changing race fluctuations.

According to the reserve Bank of India ACT, 1934, after the RBI has made provisions for bad and doubtful debt and achieved all its costs, including any provisions that it must make for buffers funds, “the balance of the profit is paid to the central government”.

The debate therefore has the size of the buffer that the RBI should maintain.

What kind of buffer levels does the RBI maintain?

The main buffer fund that maintains the RBI is called the contingent risk -buffer (CRB), which is in fact a safety net in the case of a financial stability crisis.

In 2018 a committee was founded under the chairmanship of the former RBI Governor Bimal Jalan to determine the RBI’s Economic Capital Framework (ECF), including how large the CRB should be. At the time, the Commission recommended that the CRB should be within the reach of 5.5-6.5% of the RBI balance. This was taken over by the RBI in 2019.

The Jalan Committee has also recommended to be assessed the ECF every five years, which the central administration of the RBI has just completed. The central board decided that the CRB range would be widened to 4.5-7.5%from 2024-25.

In 2018-19 to 2021-22, the RBI kept the CRB at 5.5% of its balance, because of the COVID-19 Pandemie and its impact on the economy. This was then increased to 6% in 2022-23 and 6.5% (the maximum limit at that time) in 2023-24. Before 2024-25, the RBI board decided to keep the CRB on the new highest limit of 7.5% of the balance of the Central Bank.

The profit of the central bank has been such that, despite this higher provision – it could still know to transfer a record £ 2.69 Lakh Crore to the central government.

Have these transfers happened in the past without controversy?

In short, no. Although the surplus transfers have not been the only reason for bitterness between the RBI and the Ministry of Finance, it certainly played an important role.

Take, for example, the statement of the then RBI -Adjunct -Gouverneur Viral Achanya in 2018 in which he complained that the RBI was “neither an independent nor an autonomous institution” and that governments that do not respect the independence of the central bank “will be to undermine an important regulatory institution”.

It was never officially clarified what this was about, but reporters who cover the beat knew at the time that a large part was about the government demanding large transfers of surpluses, and the RBI resisted.

Then there is the explosive passage in the book of the former financial secretary Subhash Chandra Garg We also make policyIn which he says that – during a meeting with the then RBI Governor Urjit Patel in September 2018 – Mr. Patel said that he was like a “snake about a wealth of money”.

Both Mr Achaharya and Mr Patel resigned with the government shortly after their disagreements. The issue was then demolished, especially as soon as the formula of the Jalan Committee was adopted.

Are such big transfers the new normal?

The higher transfer this year was due to higher foreign exchange sales by the RBI, higher income on its foreign exchange activa and its tools for liquidity management.

As Madan Sabnavis, chief -economist at the Bank or Baroda, noted, the exchange sales of the RBI – an important engine of profit – may not be at the same level next year.

On the other hand, however, the RBI has now also provided a wider band for the CRB. So if it decides next year to stick to the lower end of 4.5%, it can have a larger amount left to send to the government.