RBI’s surplus transfer

• Context (IE): The central board of the Reserve Bank of India (RBI) approved a transfer of Rs 2.11 lakh crore as surplus to the Central Government for the accounting year 2023-24.
• This surplus transfer to the government is a 141 per cent jump over the last year’s (2022-23) transfer.

Credit: TH

Factors behind record surplus payout by RBI

• Higher income from its foreign exchange holdings.
• Higher interest income on domestic as well foreign securities it holds in the wake of high interest rates in India and abroad.
• Increase in the prices of gold.

How would the record transfer help the government?

• Higher-than-budgeted RBI surplus transfer would help to boost the government’s resource envelope in FY2025, allowing for enhanced expenditures or a sharper fiscal consolidation.
• The government can reduce its dependence on market borrowings, thus, lowering borrowing costs. If the government borrowings are lower, it will soften yields, bringing in respite in the bond market.

What is the surplus income?

• The surplus income of the RBI that is transferred to the government is the difference between RBI’s income and expenditure, including the provisions made for reserves and retained earnings.
• Under Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934, profits/surplus of the RBI are to be transferred to the government after making various contingency provisions and public policy mandates of the RBI, including financial stability considerations.
• The transfer is in accordance with the Economic Capital Framework (ECF) adopted by the RBI board, in line with the recommendations of the Bimal Jalan Committee.

Source of Earnings for RBI

• 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, such as overnight.
• Management commission for managing the borrowings of both central and state governments.
• Regulation of banks and non-banking financial bodies.
• Commission from overseeing government transactions and specific underwriting endeavours.

Does the RBI pay tax on these earnings?

• Section 48 (Exemption of Bank from income-tax and super-tax) of the RBI Act, 1934, provides an exemption to the RBI from paying income tax or any other tax, including wealth tax.

Expenditure of RBI

• Expenditure on printing of currency notes.
• Salaries to staff.
• Commission to banks for undertaking transactions on behalf of the government across the country and to primary dealers, including banks, for underwriting some of these borrowings.

Factors influencing surplus income of RBI

• Investments
• Dollar holding valuation dynamics
• Currency printing fees
• Rupee depreciation

Why are these called transfers to the government rather than dividends?

• RBI is not a commercial organisation like banks and other companies owned or controlled by the government – it does not, as such, pay a “dividend” to the owner out of the profits it generates.
• Although RBI was promoted as a private shareholders’ bank in 1935 with a paid-up capital of Rs 5 crore, the government nationalised it in January 1949, making the sovereign its “owner”. This structural change means that instead of typical dividends, the RBI channels its net income to the government.

Globally, what are the rules relating to payment of dividends by central banks?

• The laws of many top central banks—the US Federal Reserve, Bank of England, German Bundesbank, and Bank of Japan—clearly state that profits must be transferred to the government or the treasury.