RBI’s record surplus transfer a boon for new government

Recently, the Reserve Bank of India (RBI) Central Board decided to transfer a surplus of Rs 2.1 lakh-crore to the Union government for FY2023-2024. At the end of every financial year, there is heightened anticipation about the quantum of the RBI’s surplus transfers to the government. The anticipation is even more in an election year, especially when the surplus transfer is the highest in the central bank’s history.

How did the RBI generate a record surplus in 2023-2024? The details on the RBI’s income and expenses will be released in its Annual Report for 2023-2024 later. One can draw some pointers from the RBI press release and its balance sheet which is published weekly. RBI’s Annual Accounts closes on March 31, 2024, and based on weekly data we have data as of March 29, 2024.

The data shows that Assets/Liabilities have increased by Rs 7.2 lakh-crore in one year. Within liabilities, we see a rise in all three sub-categories. Within assets, we see a rise in all the categories barring investment in government securities. The value of assets can increase due to the addition of new assets and due to valuation gains. For instance, if the rupee depreciates in the period — which it has from Rs 82.5 per USD in April 2023 to Rs 83.5 per USD in March 2024 — the depreciation will lead to a higher valuation of foreign exchange reserves, leading to larger surpluses. Likewise, the price of gold rose in this period, leading to a rise in the valuation of assets.

Large gains

After reviewing these gains in income, one critical decision is the amount of contingency reserves the RBI should maintain for the financial year. In 2018, the RBI established a committee under Bimal Jalan to recommend the level of contingency reserves. The committee recommended the reserve be between 5.5 and 6.5 per cent of the RBI’s balance sheet.

For 2023-2024, the RBI Board decided to increase the reserve from 6 per cent to 6.5 per cent of the balance sheet. The transferred surplus after this is Rs 2.1 lakh-crore. The RBI must have made large gains in valuations of assets as even with a higher contingency reserve it has given a record dividend to the Union government.

Creating a flutter

What does the record dividend imply for government finances? In the Union Budget, the government revised the dividend to be received from Public Sector Banks and the RBI from Rs 48,000 crore to Rs 1.04 lakh-crore. This Rs 2.1 lakh-crore is just on account of the RBI, and there could be additional dividends from the PSBs. The bumper dividend will help the government with higher receipts but will lead to a lower fiscal deficit for 2023-2024.

The RBI’s record surplus transfer has created a flutter in financial markets, which has reacted favourably with the 10-year benchmark bond yield declining sharply from 7.08 per cent to 6.98 per cent. The equity market has also rallied. It is interesting how the RBI’s dividends have become an important source of non-tax receipts for the government over the last few years. It is even more interesting that the financial markets which looked at all such transfers with scepticism earlier are rejoicing over them now.

(Amol Agrawal is an economist teaching at Ahmedabad University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.