Why RBI's dividend to Centre is at a record high in FY25 & a volatile history of its surplus transfers

The Print

3 days ago

The ECF governs how much capital the RBI should maintain to cover its various risks and how much of its surplus income can be transferred to the government. The Reserve Bank of India Act, 1934, gives the RBI paid up equity capital of Rs 5 crore. However, under the provisions of Section 47 of the Act, the RBI created discretionary reserves and revaluation accounts to account for fluctuations on its assets side as well as unforeseeable expenses.
The announcement of surplus transfer followed a review of the Economic Capital Framework (ECF), which is used to determine provisioning for various kinds of risks the central bank is subjected to and surplus distribution by the central bank.
Last week, the Reserve Bank of India (RBI) announced a record Rs 2.69 lakh crore annual dividend to the central government for FY 25. The record transfer is in spite of the RBI raising the Contingency Risk Buffer (CRB) to 7.5 percent of the balance-sheet from its previous level of 6.5 percent in 2023-24.
There are five major reserves operated by the RBI that have quasi-equity like functions. They are Contingency Fund (CF), Asset Development Fund (ADF), Currency and Gold Revaluation Account (CGRA), Investment Revaluation Account (IRA) and Foreign Exchange Forward Contracts Valuation Account (FCVA). The CF represents the amounts added on a year-to-year basis for meeting unexpected and unforeseen contingencies.
The ADF was created to make investments in subsidiaries and associated institutions. The Currency and Gold Revaluation Account (CGRA) reflects the unrealised gain/losses on revaluation of Foreign Currency Assets and Gold which are credited/debited to this account. The Investment Revaluation Account-Foreign Securities (IRA-FS) and the Investment Revaluation Account-Rupee Securities (IRA-RS) account for unrealised gains/losses in foreign and rupee-dated securities, respectively. The unrealised gains/losses arising from forward contracts (marked to market revaluations) are accounted for in the FCVA. The RBI's total economic capital includes the realised equity (CF and ADF) plus the three revaluation balances.
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Risks
These reserves are maintained to deal with risks. The determination of capital is based on the risk a central bank may face. Market risk captures the risk of losses arising from adverse movements in valuation of assets of the RBI, including foreign reserves, gold and government securities. Credit risk arises if a borrower fails to default on any type of debt. This is not a very prominent source of risk for a central bank. Operational risk may emerge from the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
For a central bank, the most important source of risk emerges from its monetary policy operations and financial stability mandate. Forex intervention (buying of dollar and sale of rupees) in the wake of capital inflows increases domestic liquidity. If sterilisation operations are conducted to absorb the excess liquidity, it changes the composition of the balance sheet by increasing the forex component. This not only increases the currency risk of the RBI, but also reduces its income as it replaces high yielding domestic securities with lower yield foreign securities.
Revised ECF
The revised ECF was introduced by RBI in May 2025, marking the first major update since the 2019 framework based on the recommendations of the Bimal Jalan Committee report. The changes aim to enhance flexibility, risk sensitivity, and financial resilience amid evolving macroeconomic challenges.
Some of the key changes include the raising the CRB and the inclusion of off-balance sheet exposures in market risk assessment. CRB is a component of RBI's realised equity that accounts for operational, credit, and financial stability and monetary risks.
Below is a comparison of the new framework with its predecessor:
Stability risk buffer and distribution smoothing
RBI noted that in the previous years the surplus transfers made to the government have been volatile. To solve this, the monetary and financial stability risk buffer range has been increased to 5 percent ± 1.5 percent, allowing provisioning between 3.5 percent to 6.5 percent.
It was stated that the earlier range did not provide adequate flexibility to smoothen the transfer to the government. Therefore, the revised range is said to provide RBI with ample room to determine its buffer amount while also smoothening the transfers made to the government.
Distribution smoothing is a model of remittance that reduces the volatility of the surplus transferred to the government. The volatility is typically reduced through clear rule-based methodology for transfers made by the central bank. For instance, the National Bank of Switzerland has entered into an agreement with the Department of Finance to determine the annual amount of transfer to the government for a 5-year period. This agreement aims to even out any medium-term volatility. Similarly, the Swedish central bank, Riksbank, smoothens its remittances by transferring a 5-year average of its net adjusted income to the government. These are explicit smoothing arrangements aimed at addressing the distribution asymmetry arising from income fluctuations for central banks.
The adoption of the ECF added structure to RBI's surplus distribution policy, but the framework relies on broad principles when provisioning for monetary and financial stability risks. While increased flexibility allows for adaptability to changing risk environments, its use for smoothing of transfers, in the absence of a clear methodology, can give rise to unpredictability. The core issue here is not of flexibility but flexibility without clarity. The provision to be made each year appears to be based on the discretion of the central bank. This could mean that the increased buffer range may not necessarily solve the issue of erratic transfers.
A clear rule-based framework for provisioning within the given range could provide more transparency and lead to less volatility in transfer of surplus to the government.
Radhika Pandey is an associate professor and Nipuna Varman is a research fellow at the National Institute of Public Finance and Policy.
Views are personal.
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