From Tug of War to Truce: How RBI & Govt Found a Surplus Sweet Spot

RBI transfers Rs 2.69 lakh crore surplus to GoI. What changed behind the scenes? Subhash Chandra Garg decodes.

The Reserve Bank of India (RBI) has transferred Rs 2.69 lakh crore surplus to the Government of India (GoI) for the financial year 2024-25—about 27.5 percent higher than the Rs 2.11 lakh crore transferred last year.

(Photo: Vibhushita Singh/The Quint)

The Reserve Bank of India (RBI) has transferred Rs 2.69 lakh crore surplus to the Government of India (GoI) for the financial year 2024-25—about 27.5 percent higher than the Rs 2.11 lakh crore transferred last year. 

This was after the RBI made a transfer of Rs 44,862 crore to its Contingent Fund (CF), a reserve which houses cash profits retained by the RBI—a realised equity reserve fund. To facilitate this transfer to the CF, the RBI raised its upper limit to 7.5 percent of its assets from the earlier maximum limit of 6.5 percent.

The RBI realised its equity reserve fund/CF was less than 1 percent before Raghuram Rajan and Urjit Patel teams raised it to a minimum 4 percent in 2016-17. The Bimal Jalan Committee subsequently boosted it further to a range of 5.5 percent to 6.5 percent. With the latest tweak, it now stands at a revised range of 4.5 percent to 7.5 percent.

The RBI has never been called to use its CF in its 90 years of existence nor is it expected to in the foreseeable future. However, from 2019-20 to 2023-24, the RBI had to transfer as much as Rs 3.83 lakh crore to this fund. This led to highly variable surplus transfer to GoI—ranging from Rs 0.3 lakh crore in 2021-22 to Rs 2.11 lakh crore in 2023-24. 

Why has there been so much volatility in surplus transfer to GoI? What difference will the new range of 4.5 percent to 7.5 percent make?

Three Factors Determine RBI Surplus

1. For its normal business operations, the RBI—an extraordinary institution—has almost costless liabilities: currency issued, deposits maintained under the Cash Reserve Ratio (CRR), and its own accumulated equity and revaluation reserves. However, it earns interest income on all its assets, primarily domestic rupee securities and foreign currency reserves. This income, minus a small cost of RBI operations, such as printing notes, makes up its normal income surplus. 

2. The RBI’s large foreign currency assets (and now gold), accumulated at relatively low rupee costs, appreciates in value as rupee depreciates against foreign currencies. The RBI can convert these gains into extraordinary cash profits by selling and buying these foreign currency assets at current rupee prices. 

3. The RBI provides for any valuation losses on its rupee and foreign currency assets, on account of movement of interest rates, which is accounted for in the CF directly. 

The total of these three profit or losses make up the total surplus of the RBI. Unfortunately, the accounts presented by the RBI do not show these components transparently and clearly. The accounts also do not present its total profits/surplus, showing it almost equal to surplus transferred to the GoI. 

One can, however, determine these three streams of profits and aggregate profits by delving deeper into the RBI accounts and notes. 

RBI’s Surplus in FY 2024–25

The RBI’s total profit or surplus for FY 2024-25 is Rs 3.13 lakh crore, which can be arrived at by simply adding the amount transferred to the CF (Rs 0.45 lakh crore) to the surplus available for transfer (Rs 2.69 lakh crore). 

As the RBI’s surplus in 2023-24 was Rs 2.54 lakh crore, its cash surplus has risen by Rs 0.6 lakh crore in 2024-25.

To determine the breakdown of this income, one must begin by locating the RBI’s extraordinary profits from the sale and purchase of foreign currency assets. This is disclosed in Schedule 14 of the accounts, under item 14(b)(iii). For FY 2024-25, this income amounted to Rs 1.11 lakh crore (compared to Rs 0.84 lakh crore in 2023-24).

The RBI’s operational income is its total income minus the extraordinary gains from the sale of FC assets. For 2024-25, it turns out to be Rs 2.27 lakh crore (total income Rs 3.38 lakh crore minus Rs 1.11 lakh crore). As the RBI’s total operational expenses were only Rs 0.25 lakh crore, its normal profits amounted to Rs 2.02 lakh crore (Rs 1.70 lakh crore in 2023-24).

The third element can be only indirectly determined. The RBI’s CF increased from Rs 4.29 lakh crore at the end of FY 2023-24 to Rs 5.42 lakh crore in 2024-25 (an increase of Rs 1.14 lakh crore). The RBI, however, transferred only Rs 0.45 lakh crore from its profit and loss account. The difference of Rs 0.69 lakh crore came from writing back excess provisions in risk provisions due to favourable movement in interest rates both for rupee and foreign currency securities. 

Transferred 100 Percent of Normal Profits

The primary point of contention between the GoI and the RBI during 2017-19 was about allocation of the RBI’s normal profits.

The RBI wanted to retain a big share, whereas GoI wanted all of it. The Bimal Jalan Committee’s principal recommendation—to raise the CF to a minimum of 5.5 percent of RBI’s assets—was designed to allow the RBI to retain a good part of its surplus. 

However, the RBI had assured the government that it would transfer large surpluses to it.

Certain factors like low interest rates during pre-COVID period on foreign currency assets and later, large provisioning due to rising interest cost did not allow the RBI to make promised high surplus transfers.

To ensure decent resource flow to the GoI, the RBI started resorting to selling and buying its foreign currency assets to generate additional extraordinary profits. 

According to the RBI’s own internal review document titled Economic Capital Framework of the Reserve Bank of India – Internal Review of the Framework, released recently, the RBI transferred Rs 3.83 lakh crore to the CF and Rs 6.61 lakh crore as surplus to the GoI during the period 2018-19 to 2023-24.

Including the Rs 0.45 lakh crore transferred to the CF in 2024-25, the RBI has transferred a total of Rs 4.28 lakh crore to the CF. Including the Rs 2.69 lakh crore transferred in FY 2024-25, the RBI transferred Rs 9.3 lakh crore as surplus to the GoI during this period.

Interestingly, during this period, the RBI earned exceptional income of Rs 4.77 lakh crore (Rs 0.29 lakh crore,  Rs 0.30 lakh crore, Rs 0.51 lakh crore, Rs 0.69 lakh crore, Rs 1.03 lakh crore, Rs 0.84 lakh crore, and Rs 1.11 lakh crore, respectively). Since this exceptional income is higher than the total transfers of Rs 4.28 lakh crore made to the CF, the RBI ended up transferring more than its total normal surplus to the GoI. 

What was the point of fighting with the GoI and designing a convoluted Economic Capital Framework (ECF), with its complex concepts such as revaluation reserves not being less than Expected Shortfall (ES) at a Confidence Level (CL) of 97.5 percent, and provisions for monetary stability, credit ,and operational risks?

In the end, it has proven to be an unnecessary love’s labour lost.

Ensuring Stable Surplus Transfersx

Without appointing another expert committee, the RBI and the GoI seem to have arrived at a good understanding: the RBI will provide the GoI steady surplus transfers at the level of about Rs 2.5 lakh crore annually, with a potential to rise.

While this could have been achieved by a simple arrangement—such as by agreeing that 100 percent of normal profits would be transferred to the government—the RBI, perhaps not wanting to be seen abandoning its intellectual veneer, has made two tweaks to its ECF and Surplus Distribution Framework (SDF). 

1. First, the requirement that revaluation reserves must meet at least the Expected Shortfall at a Confidence Level of 97.5 has been turned to 99.5 percent Confidence Level. This proforma change has no downside for surplus transfer as the lower bound remains unchanged.

2. The Bimal Jalan Committee range of 5.5 percent—6.5 percent for the CF has been enlarged to 4.5 percent—to 7.5 percent. While in the years of high profits like the current 2024-25, it allows the RBI to make more transfers to the CF; its real use would be in years of deficient profits. The RBI would be able to draw during such times from the CF and make stable transfers to the GoI. As the RBI asset base approaches Rs 100 lakh crore, 3 percent flexibility in the CF means flexibility of withdrawing Rs 3 lakh crore from the CF.

In the end, the revised ECF and SDF will keep both, the GoI and the RBI happy. 

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. 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.)