Context: The central board of directors of the Reserve Bank of India (RBI) reviewed the Economic Capital Framework (ECF). ECF is a financial governance tool that guides RBI to determine risk provisioning and surplus transfers to the government.
Relevance of the Topic: Prelims: Key facts about Contingency Risk Buffer; Economic Capital Framework.
How does the RBI transfer surplus to the Central government?
Based on the Economic Capital Framework (ECF), RBI transfers dividends to the government every year.
- After setting aside the Contingency Risk Buffer and other operational expenditures (salaries etc.) from the earnings of RBI, the surplus is transferred to the central government in the form of dividends. Surplus transfer from RBI is an important component of non-tax revenues to the central government.
- Bimal Jalan Expert Committee (2019):
- The expert committee led by the former RBI Governor recommended that the ECF framework be periodically reviewed every five years.
- It suggested that the Contingency Risk Buffer should be 5.5-6.5% of the RBI's balance sheet to ensure adequate risk provisioning.
- The surplus RBI transfers to the government depends on how much risk buffer it wants to maintain. A higher risk buffer would mean a lower amount of transferable surplus and vice versa.
Note:
- RBI will transfer ₹2,68,590 crore surplus to the Union government as dividend for the accounting year 2024-25. This is 27% more than the dividend paid in the previous year.
- Based on revised Economic Capital Framework (ECF) and taking into consideration the macroeconomic assessment, the RBI board has decided to further increase the Contingent Risk Buffer (CRB) to 7.50%.
- It is estimated that the RBI may transfer Rs 2.5 lakh crore to Rs 3 lakh crore as surplus to the government for the accounting year 2024-25. In 2023-24, the RBI had transferred the highest-ever surplus transfer of Rs 2.11 lakh crore.
- In FY25, the RBI’s earnings were robust, driven by sale of dollars to curb volatility in the rupee; sharp rise in gold prices; appreciation in prices of government securities held by the RBI.
Key Concepts
Source of Earnings for RBI:
- Interest on Government securities held
- Interests on loans and advances made
- Interest earned on Liquid Adjustment Facility operations
- Interest income from foreign currency assets held
- Earnings from forex swaps
- Seigniorage (difference between cost of printing currency note and its face value)
- Valuation gains from Gold
Contingency Risk Buffer:
- CRB is the reserved fund within the Economic Capital Framework (ECF) that is maintained by RBI to address potential financial disruptions or crises.
- It is the country’s savings for a ‘rainy day’ (financial stability crisis) which the central bank consciously maintains in view of its role as Lender of Last Resort.
Significance:
- Higher dividend payout by the RBI will help the government in managing the fiscal deficit.
- Higher surplus transfer is likely to improve liquidity conditions in the system.