Central Idea

• The Central Board of Directors of the RBI approved the transfer of ₹87,416 crore as surplus to the Union government for the accounting year 2022-23.
• This amount is almost three times the ₹30,307 crore transferred in the previous fiscal year.

Reserve funds of RBI

The RBI has two types of reserves: Currency & Gold Revaluation Account (CGRA) and Contingency Fund (CF).

1. CGRA: It represents the value of gold and foreign currency held by the RBI on behalf of India and fluctuates based on market movements.
2. Contingency Fund: It is a provision to meet unexpected contingencies arising from the RBI’s monetary policy and exchange rate operations.

Calculation of Surplus

• RBI’s surplus is the amount transferred to the government after meeting its needs and provisions.
• The surplus is determined by deducting expenses, including provisions made to the CF, from the RBI’s income, mainly generated through interest on securities.

How does RBI earn its INCOME?

The RBI earns profits through various functions and operations it carries out, including:

1. Managing the borrowings of the Government of India and State governments.
2. Supervising and regulating banks and non-banking finance companies.
3. Managing the currency and payment systems.

RBI generates income through the following sources:

1. Returns on its foreign currency assets, such as bonds and treasury bills of other central banks or top-rated securities.
2. Interest earned on holdings of local rupee-denominated government bonds or securities.
3. Interest earned from lending to banks for short tenures, such as overnight loans.
4. Management commission received for handling government and state government borrowings.

Expenditure by RBI

The RBI’s expenditures include-

1. Costs related to printing currency notes
2. Staff salaries
3. Commissions paid to banks for government transactions and
4. Payments to primary dealers for underwriting borrowings

How the transfer of surplus takes place?

• The RBI, as a central bank, is not a commercial organization owned or controlled by the government.
• The RBI was initially a private shareholders’ bank but was nationalized by the government in January 1949.
• According to Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934, the RBI transfers the excess of income over expenditure to the government.
• This provision mandates the transfer of profits to the Central Government after accounting for necessary provisions and obligations.

Does the RBI pay tax on these earnings or profits?

• No, the RBI is exempted from paying income tax or any other tax as per Section 48 (Exemption of Bank from income-tax and super-tax) of the RBI Act, 1934.
• This exemption ensures that the RBI is not liable to pay income tax or super-tax on its income, profits, or gains.

Policy inputs

(1) Y H Malegam Committee

• It reviewed the adequacy of reserves and surplus distribution policy in 2013, recommended a higher transfer to the government.
• Prior to this recommendation, the RBI transferred a portion of the surplus to the Contingency Fund and the Asset Development Fund.
• Following the Malegam committee’s recommendation, the percentage of surplus transferred to the government significantly increased from 53.40% in 2012-13 to 99.99% in 2013-14.

(2) Bimal Jalan Committee

• The RBI in November 2018 had constituted a 6-member committee, chaired by former governor Dr Bimal Jalan.
• It was tasked to review the current economic capital framework (ECF), after the Ministry of Finance asked the central bank to follow global practices.

Key recommendations

1. Differentiate between realised equity and revaluation balances for RBI’s economic capital.
2. Adopt Expected Shortfall (ES) for measuring market risk with a target of ES 99.5% confidence level.
3. Maintain Contingent Risk Buffer (CRB) between 6.5% and 5.5% of RBI’s balance sheet.
4. Implement surplus distribution policy based on realised equity.
5. Review RBI’s Economic Capital Framework every five years.

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