RBI Approves Record Surplus Transfer to Central Government

Context:

The Central Board of the Reserve Bank of India (RBI) has approved a record surplus transfer of Rs 2.11 lakh crore to the Central government for the fiscal year 2023-24. This transferable surplus has been calculated based on the Economic Capital Framework (ECF).

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. What is the Economic Capital Framework (ECF)?
2. What is the Surplus Distribution Policy of the Revised ECF?
3. Surplus Transfer by the RBI to the Central Government
4. What Led to the Higher Dividend Transfers to the Government?

What is the Economic Capital Framework (ECF)?

• Purpose: The ECF provides a methodology for determining the appropriate level of risk provisions and profit distribution as per Section 47 of the RBI Act 1934.
• Profit Distribution: The central bank must pay the balance of its profits to the central government after accounting for bad and doubtful debts, asset depreciation, and staff contributions.

Old ECF

• Development: The old ECF was developed in 2014-15 and became operational in 2015-16.
• Review: In 2018, the RBI constituted an Expert Committee chaired by Dr. Bimal Jalan to review the existing economic capital framework and propose a suitable surplus distribution policy.

Revised ECF

• Adoption: The RBI adopted the revised ECF on August 26, 2019, based on the recommendations of the Bimal Jalan Committee. This framework may be reviewed every five years.

What is the Surplus Distribution Policy of the Revised ECF?

Previous Policy

• Focus: The earlier surplus distribution policy targeted only the total economic capital.
• Components: Economic capital includes the central bank’s capital, reserves, risk provisions, and revaluation balances.

Expert Committee Recommendations

• Inclusion of Realised Equity: The target should also include realised equity, which is part of RBI’s economic capital comprising its capital, reserve fund, and risk provisions.
• Total Economic Capital: Should be maintained between 20.8% to 25.4% of the RBI’s balance sheet.

Contingent Risk Buffer (CRB):

• Range: The CRB should be maintained within 5.5-6.5% of the RBI’s balance sheet.
• Purpose: Covers monetary, fiscal stability, credit, and operational risks.
• Role: Acts as the country’s savings for financial stability crises, maintained by the RBI as the Lender of Last Resort.

Surplus Distribution

• Above Required Levels: If realised equity is above the required levels, the entire net income of the RBI will be transferred to the government.
• Below Required Levels: If realised equity is below the required levels, risk provisioning will be made as needed, and only the residual net income will be transferred to the government.

Surplus Transfer by the RBI to the Central Government

• Amount Transferred: The Central Board of Directors of the RBI approved a transfer of Rs 2,10,874 crore as surplus to the Central Government for the accounting year 2023-24.
• Comparison with Previous Year: This transfer is more than double the Rs 87,416 crore transferred in FY23.
• CRB Adjustment: The RBI Board decided to increase the Contingent Risk Buffer (CRB) to 6.50% for 2023-24 from 6% the previous year, reflecting the robust and resilient economy.
• Fiscal Deficit Target: The Interim Budget for FY2025 set a target to reduce the fiscal deficit to 5.1% of GDP in FY25 from 5.8% in FY24.
• Impact: The significant dividend payout is expected to ease the FY25 fiscal deficit by about 0.2% of GDP, considering potential shortfalls in disinvestment receipts and moderate tax collection growth.

What Led to the Higher Dividend Transfers to the Government?

Variable Repo Rate (VRR) Auctions:

• Revenue Increase: The higher dividend, which represents an additional fiscal revenue of 0.4% of GDP, is partly due to increased revenue from the RBI’s VRR auctions conducted last year to provide funding support to banks amid tight liquidity.

Revaluation Gains on Forex Reserves:

• Interest Rates: Higher interest rates on domestic and foreign securities.
• Foreign Exchange Sales: Significantly higher gross sales of foreign exchange also contributed to the increased dividend.

Surplus Income:

• Sources: The RBI’s surplus income from investments, valuation changes on dollar holdings, and fees from printing currency.

Rupee Depreciation:

• Effect: The rupee’s depreciation against the dollar has also led to the increased surplus transfer.

-Source: The Hindu