Decline in RBI's Surplus Transfer to the Government

Published: 11th May, 2024

Context

The Reserve Bank may give the government a smaller dividend for FY 2023–2024 than the massive Rs 87416 crore paid out the year before. This decline in surplus transfer warrants a closer examination of the underlying causes and its implications for both monetary and fiscal policy.

1: Dimension- Reason behind decline in Income

Lower commission income from forex sales: The central bank sold fewer dollars in comparison to the preceding year.
- Factor responsible: This decline in forex transactions can be attributed to various factors, including changes in global economic conditions, fluctuations in currency exchange rates, and shifts in trade dynamics.
Accelerated growth of RBI's balance sheet during the fiscal year. This expansion necessitated higher provisioning, thereby reducing the available surplus for transfer to the government.
Factor responsible: The expansion of RBI's balance sheet could be attributed to several factors, including monetary policy interventions aimed at stabilizing financial markets, liquidity management measures, and responses to economic shocks.

2: Dimension- Implications of the reduced surplus transfer

Impact on Planning: From a fiscal perspective, it may pose challenges for the government's budgetary planning and expenditure allocation.
Impact on public spending: It could necessitate adjustments in fiscal policies, potentially impacting public spending on critical sectors such as healthcare, education, and infrastructure development.
More debt: A lower surplus transfer may exert upward pressure on the government's fiscal deficit, thereby influencing debt dynamics and borrowing costs.

The reduced surplus transfer underscores the importance of maintaining a delicate balance between financial stability objectives and fiscal considerations. While the RBI plays a crucial role in supporting economic recovery and maintaining price stability, the constraints on surplus transferability highlight the need for prudent financial management and policy coordination.

Fact Box: RBI’s Surplus Transfer

The Reserve Bank of India (RBI) transfers its surplus to the government annually.
The RBI's surplus is typically transferred to the government after necessary deductions are made for various reserves, including the Contingency Fund and Asset Development Fund.
This surplus is generated from its earnings minus expenditures.
- Surplus distribution policy: The Jalan Committee recommended a surplus distribution policy that follows the realised equity maintained by the RBI. It gave a range of 5.5-6.5% of RBI's balance sheet for Contingent Risk Buffer.
The surplus is transferred to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.
As the RBI is owned by the government, any surplus it generates belongs to the government.

RBI’s Earnings	RBI’s Expenditure
Open market operations Interest received from (bonds, treasury bills, top-rated securities, and deposits) Interest on its holdings of local rupee-denominated government bonds· Interests on lending to banks (overnight). Dealings in the foreign exchange market	Printing of currency notes· Staff· To banks for undertaking transactions on behalf of the government across the country· To primary dealers, including banks, for underwriting some of these borrowings.

UPSC PYQ

Q. In the context of Indian economy, Open Market Operations’ refers to- (2013)

borrowing by scheduled banks from the RBI
lending by commercial banks to industry and trade
purchase and sale of government securities by the RBI
None of the above

Solution: (c)

CURRENT AFFAIRS FOR UPSC IAS

Decline in RBI's Surplus Transfer to the Government

1: Dimension- Reason behind decline in Income

2: Dimension- Implications of the reduced surplus transfer

Fact Box: RBI’s Surplus Transfer

UPSC PYQ

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