The Reserve Bank of India (RBI) has handed the Centre a record dividend of Rs 2.86 lakh crore for FY26 with the surplus transferred being substantially bigger than Rs 2.69 lakh crore for FY25 and Rs 2.11 lakh crore for FY24. The funds will come in handy in the backdrop of the war in West Asia showing no signs of ending soon and inflation threatening to curb consumption and hurting tax revenues. A supply shock accompanied by demand compression amid high prices and slowing activity may weigh on India’s FY27 economic growth, the government has cautioned.
Rising interest rates could push up the cost of borrowings for the government — the yield on the sovereign benchmark has stayed firmly above 7%. Unless the war ends and oil prices trend down to levels of $80-85/barrel, achieving the deficit target of 4.3% of GDP looks difficult.
In FY26 too, the RBI’s surplus transfer of Rs 2.69 lakh crore helped rein in the deficit to Rs 15.6 lakh crore (revised estimates). The transfers are now becoming material to the fisc, having risen substantially over the years. In FY16, for instance, the amount given by the RBI was Rs 65,876 crore. In recent years, the central bank’s profits have been driven up by higher global interest rates which have earned it more on its dollar assets. Moreover, it has been participating more often in the currency markets and would have made gains through its interventions. The RBI is also believed to have added to its gold assets. In some years, FY25 for instance, the central bank saw the value of its gold portfolio appreciate sharply.
While the Centre has benefitted hugely from the RBI’s largesse in the last few years, there are those who have their reservations about this generosity. They suspect the RBI is turning increasingly into a so-called benefactor to the government, helping the latter balance the fisc. The conservative lot prefers that the central bank restrict itself primarily to its role of performing monetary functions; managing inflation, liquidity, acting as the lender of the last resort, managing the forex reserves and currency, and so on. There is concern the government is leaning a tad too heavily on the RBI’s balance sheet. The central bank already holds gilts and banks, too, via the statutory liquidity ratio.
For instance, the central bank might choose to lower contingency buffers or even look to earn more via forex trading simply in an effort to boost profitability. Such an approach, experts fear, could hurt the RBI’s credibility. For FY26, the RBI has maintained the Contingency Risk Buffer (CRB) at 6.5% of the balance sheet, lower than the 7.5% maintained for FY25. The band prescribed by the Bimal Jalan Committee’s New Economic Framework was 4.5-7.5%.
The central bank has observed it has taken into account “macro-economic factors” while deciding on the CRB, which is not unreasonable. In fact, the more moderate view on surplus transfers acknowledges the highly volatile environment of recent years and the challenges this has thrown up. Such exceptional conditions, experts say, require the central bank to play a bigger role in ensuring financial stability, helping out during any crises and perhaps even providing the occasional bailout. That may be valid but the RBI should always act prudently. Financial stability may be in its remit, but its independence and credibility remain paramount.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.