RBI surplus debate: Why central bank transfers surplus profit to government, how it works; key things to know

By: | Published: November 10, 2018 9:52 AM

Clearing stand on the issue of RBI's surplus transfer, Principal Economic Adviser Sanjeev Sanyal on Friday said these reserves should be a legitimate area of discussion and discussed at the board level, even as the tussle between the central bank and government continues.

According to the RBI Act, every year, the central bank, after making provisions for bad debts, contribution to staff, depreciation of assets and superannuation funds, transfers balance of its profits to its owner i.e. the government.

Clearing stand on the issue of RBI’s surplus transfer, Principal Economic Adviser Sanjeev Sanyal on Friday said these reserves should be a legitimate area of discussion and discussed at the board level, even as the tussle between the central bank and government continues. “This is nothing new to India at all. Every central bank discusses it and this has been the case with India as well,” Sanjeev Sanyal told CNBC TV18 in an interview. He also said that the issue is discussed from time to time and former chief economic adviser (CEA) Arvind Subramaniam had also written about it in one of his economic surveys.

But, why RBI transfers surplus capital and how the entire process works?

According to the RBI Act, every year, the central bank, after making provisions for bad debts, contribution to staff, depreciation of assets and superannuation funds, transfers balance of its profits to its owner i.e. the government. However, there is no standard benchmark followed by the RBI for the transfer. Just ahead of every union budget, a discussion happens between the government and the central bank on the surplus capital. Thereafter, the surplus expectations are put in the budget by the government, while the central bank comes out with the announcement on the amount to be transferred in August after doing its calculations.

Former RBI Governor Raghuram Rajan, in his last day in a speech delivered at St Stephen’s College, had said that the currency notes printed by the RBI are held by the people and it issues deposits to commercial banks. The RBI doesn’t pay any interest on these fixed liabilities. The bank also purchases financial assets, in forms of domestic and foreign government bonds, from the market which earn interest for RBI. He said, “so we generate a large net interest income simply because we pay nothing on virtually all our liabilities.”

Also read: RBI vs Finmin: Fiscal deficit under control, didn’t seek Rs 3.6 lakh crore from central bank, says Garg

According to Raghuram Rajan, the total cost of currency printing amounts to 1/7th of the total net interest income. Other than transferring a part of surplus profits, the central bank also looks after another task: maintaining an international AAA rating so that its credibility in the market is intact.

RBI surplus profit debate

The central bank does its risk analysis and sets out a part of its surplus profits to be transferred to the government. The reason behind the debate is: the government wants more surplus; the central bank wants to make more reserves from profits for unforeseen risks, thus resulting in a lesser surplus transfer.

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