RBI (Reserve Bank of India) dividend/surplus transfers to the government are a significant source of the latter's non-tax receipts. For the first four accounting years (2019-20 to 2022-23) of the RBI during Modi 2.0, it transferred Rs 57,128 crore, Rs 99,122 crore, Rs 30,307 crore and Rs 87,416 crore to the government as dividends, totalling Rs 2.74 lakh crore.
For the year 2023-24 alone, the RBI is transferring Rs 2.11 lakh crore to the government, nearly 77 percent of its four years' total surplus transfer.
Surprisingly, the government had no idea of this incoming bonanza while presenting the Interim Budget for 2024-25. The government provided receipts of Rs 1.02 lakh crore from dividends from all the financial institutions it owns (public sector banks, LIC, and others) and surplus transfer from the RBI.
As about Rs 25,000 crore dividend could have, most likely, come from other public sector financial institutions, the government would have factored in about Rs 77,000 crore from the RBI dividend.
The RBI delivered about three times thereof — about Rs 1.34 lakh crore extra — certainly an extraordinary gift to the government. How did the RBI manage this spectacular and totally unexpected surplus transfer? What can and should the government do with this largesse?
No Extraordinary Growth in Normal Income
The RBI is an extraordinary institution. Its resources/liabilities — currency issued, the bankers’ Cash Reserve Ratio (CRR), deposits and accumulated reserves and provisions — are completely costless.
However, the RBI earns interest (its normal income) on assets created out of its costless resources (both domestic rupee securities and foreign currency reserves). The RBI has a very small cost of printing notes, running a government banking system among other administrative responsibilities, which turns almost all income into surplus.
In 2019-20, the first year of Modi 2.0, the RBI earned a normal income of Rs 1.16 lakh crore (interest from other incomes from domestic securities) on a total asset base of Rs 53.35 lakh crore, yielding an average interest income of 2.17 percent on its assets under management (AUM).
In 2023-24, despite global interest rates having risen about three to four percent over 2019-20, the RBI earned a normal income of Rs 1.91 lakh crore on its AUM of Rs 70.48 lakh crore, yielding a gross income margin of 2.71 percent.
There was nothing extraordinary with total normal income falling short of the dividend distributed by a significant margin. Over five years coinciding with Modi 2.0, the RBI earned a total normal income of Rs 6.32 lakh crore.
RBI Has to Serve Two Big Objectives
The government expects the RBI to deliver to it all its normal profits as surplus. In addition, the Bimal Jalan Committee mandated the RBI to keep the realised/cash reserves, officially named the Contingency Fund (CF) in RBI accounts, between 5.5 percent and 6.5 percent of its total assets.
The RBI, in its press release, declaring the record dividend, also noted that it transferred Rs 42,820 crore to the CF to maintain the realised reserves at 6.5 percent of total assets, which increased the size of the CF to Rs 4.29 lakh crore.
The RBI must be using some formulae to determine total assets, as 6.5 percent of its total assets (Rs 70.48 lakh crore) at the end of 2023-24, i.e. Rs 4.58 lakh crore, is much higher than Rs 4.29 lakh crore.
This does not matter much. What matters is that the RBI has to set aside significant amounts from its surplus to keep the CF between 5.5 percent and 6.5 percent of its assets.
The RBI had to transfer as much as Rs 3.83 lakh crore to the CF from 2019-20 to 2023-24 accounts (Rs 73,615 crore from 2019-20 accounts and Rs 20,710 crore, 1,14,567 crore, 1,30,876 crore in subsequent three years and Rs 42,820 crore from 2023-24 accounts). In three years (2020-21, 2021-22, and 2022-23), the RBI had to transfer much more surplus/income to the CF than it transferred to the government as dividends.
RBI Had to Make Abnormal Profits to Serve These Objectives
The RBI’s assets are predominantly foreign currency assets (FCA) — about two-thirds of its total assets — acquired at a lesser rupee cost than the current rupee value. These unrealised profits sit in the RBI’s Currency and Gold Revaluation Account (CGRA), which also constitutes the RBI’s valuation reserves. In 2023-24, such valuation reserves were Rs 11.31 lakh crore.
Besides earning interest, income, and profit at the time of redemption of the FCA security/deposit in the normal course, the RBI can make a significant amount of exceptional income by converting the unrealised valuation gains of its foreign currency assets by selling and buying the securities at current prices.
Over the five years of Modi 2.0, the RBI earned Rs 3.22 lakh crore in such exceptional income.
A normal income of Rs 6.32 lakh crore and an abnormal income of Rs 3.22 lakh crore in five years helped the RBI earn a total income of Rs 9.54 lakh crore. After meeting its operational expenses of Rs 86,532 crore in five years, the RBI earned a total surplus of Rs 8.68 lakh crore in these five years.
After setting aside Rs 3.83 lakh crore in the CF, the RBI delivered a remaining surplus of Rs 4.85 lakh crore to the government in five years.
Falling US Interest Rates Primarily Responsible for Mega Dividend
The RBI faced a major challenge to meet the government’s dividend expectations from early 2021 as global interest rates rose post-COVID.
Besides keeping the difference in the current and acquired value of its FCAs as valuation reserves in the CGRA, the RBI has to take care of interest rate risks on its FCA, more specifically known as mark-to-market gains/losses, in a special reserve account called the IRA-FS (Investment Revaluation Account-Foreign Securities), maintained as part of the CF when the fair mark-to-market valuation goes in the negative.
As US interest rates started rising in 2021, the value of the RBI’s foreign currency assets (invested in low-interest earning deposits and securities) started falling on a mark-to-market fair valuation basis.
The RBI had to transfer Rs 94,250 crore to the IRA-FS account from its surplus in 2021-22 to cover the mark-to-market loss, which was as much as 65 percent of its total surplus of Rs 1.45 lakh crore and 124 percent of its normal surplus of Rs 75,987 crore. Likewise, in 2022-23, the RBI transferred a net Rs 71,239 crore to this account, 33 percent of its total surplus and 62 percent of the normal surplus.
This abnormal requirement primarily explains why the RBI had to cut down massively on surplus transfers to the government in these two years.
The situation reversed in 2023-24 as the US' and other foreign currency assets' interest rates peaked, plateaued, and then started falling. In 2023-24, the RBI could actually reduce accumulated IRA-FS provisions by Rs 22,268 crore, which had the effect of reducing the transfer to the CF by that amount, even to keep it at the maximum of 6.5 percent.
Extraordinary income of Rs 84,294 crore, added to its normal income of Rs 1,91,279 crore, raised the RBI’s total income to Rs 2,75,572 crore, though only 17 percent higher than the total income of Rs 2,35,457 crore in 2022-23.
Usual low operational expenses of Rs 21,874 crore (Rs 17,161 crore in 2022-23) but the unusually small requirement of transfer to the CF of only Rs 42,820 crore (Rs 1,30,876 crore in 2022-23) resulted in a big jump in the the RBI’s distributable surplus to Rs 2,10,878 crore (Rs 87,420 crore in 2022-23), which the RBI gladly passed on to the government.
RBI Delivered Nearly 100 Percent of Its Normal Surplus to the Government
The RBI earned a normal surplus (normal income minus operational expenses) of Rs 5.45 lakh crore in five accounting years coinciding with Modi 2.0.
It transferred a total of Rs 4.85 lakh crore of surplus to the government in these five years, including Rs 2.11 lakh crore for 2023-24. The RBI, thus, transferred 88.9 percent of the five-year normal surplus to the government. The government could not have expected better.
The RBI also abided by the mandate of the Bimal Jalan Committee (on paper) by generating exceptional income, i.e., converting valuation gains into cash profits, which the committee wanted to prohibit in spirit.
The government had announced in the interim budget that it would run a fiscal deficit of 5.1 percent of GDP for the year 2024-25. An additional transfer of approximately Rs 1.34 lakh crore provides a cushion of about 0.4 percent on the estimated GDP of Rs 328 lakh crore in 2024-25. The government, if it wishes, other things being equal, can go for reducing the projected fiscal deficit for 2024-25 to 4.7 percent of GDP.
Of course, it is the first year of the new NDA government — a coalition government. The government may find it difficult to resist the demands for new schemes, special packages, and enhanced expenditures on existing schemes. The record RBI dividend will most likely end up funding such additional expenditures.
(The author is former Economic Affairs Secretary and former Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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