By Mahesh Nayak
The Reserve Bank of India (RBI) on Friday decided to transfer Rs 2.69 lakh crore as surplus to the Union government for the accounting year 2024-25, all an-time high amount, and up 27% on year.
The latest dividend from the central bank was lower than recent market expectations which hovered around Rs 3-3.5 lakh crore, but came in at least Rs 40-50,000 crore higher than what was apparently projected in the Budget for 2025-26.
This time around, the RBI’s transfers will also be at the highest level as a fraction of the government’s non-tax revenue, at 46.1% (see chart), and accounts for 5.29% of the size of the Union Budget (budget estimate).
The instant record transfer is despite the RBI board having approved a revised Economic Capital Framework (ECF) in its meeting held on May 15, 2025, that allowed it to keep higher risk capital (realised equity). This was enabled by the RBI’;s balance sheet growing by 6.7% to Rs 75.4 lakh crore in 2024-25. Apart form interest receipts, substantial net gains were made in the year by selling large chunks of dollars to defend the falling rupee.
The size of the transfer, determined under the central bank’s economic capital framework (ECF), for any of its accounting year, is accounted for in the Union Budget in the subsequent financial year, as an item under non-tax revenues head.
The contingent risk buffer (CRB), or the provisioning for its assorted risks, will now be maintained within a range of 7.5% to 4.5% of the RBI’s balance sheet. This is as against 6.5% to 5.5% set aside, under ECF adopted in 2019, following the Bimal Jalan Committee recommendations.
For 2024-25, CRB is kept at 7.5%, the upper end of the range. In absolute terms, the available realised equity (ARE), proxy of CRB, is reckoned at Rs 5.78 lakh crore in 2024-25, as against Rs 4.58 lakh crore in 2023-24. The ARE mainly consists of contingency, asset development and reserve funds.
Had the CRB was maintained at 6.5% (as in 2023-24), the dividend transfer by the RBI would have been Rs 3.5 lakh crore, SBI Research noted.
The wider range of CRB will of course mute the government’s heightened expectations of profit monies from the RBI in the medium term, a necessity given the external uncertainties.
The excess dividend provides an adequate cushion to offset likely shortfall on direct tax collections, disinvestment, as well as a jump in defence sector expenditure, Gaura Sengupta, chief economist at IDFC First Bank said. She said with the higher dividend, inflows will balancing out, helping meet the fiscal deficit target of 4.4% for 2025-26. SBI Research estimates the fiscal deficit could be even lower at 4.2%.
“The upward revision in the FY2025 nominal GDP number suggests that despite a relatively lower growth of ~9.0% in 2025-26 vis-à-vis the budgeted levels of 10.1%, the fiscal defici can be contained at 4.4% in FY2026.
The RBI reported the dividend transfer post-market close, but analysts do not see a huge impact on bond yields when the market opens on Monday. “There may be a marginal impact of 1-2 bps on the bond yields,” said a bond dealer at a domestic bank, who feels all eyes will be on the policy, as the market has discounted a 25 bps rate cut in the June 2025 policy. On Friday, the 10-year G-Sec closed at 6.25%.
For 2025-26, gross tax revenue growth is estimated at a realistic 10.8% (buoyancy1.13), and net tax (after devolution) at 11%
Another economist said on condition of anonymity that wth the rising volatility in the global economy as well as lately RBI allowing the rupee to move in either direction, it made sense for the board to have a higher CRB margin. This would give the central bank greater flexibility and a cushion to manage market risks in bonds and the currency market, the person added.
Government sources said the RBI might not have felt the need to restructure the ECF as “it stood the test of time,” and only tweaked the the buffer range, because the heightened external uncertainties necessitated extra cushion against monetary and financial stability risks.
The RBI said in a statement: “It was noted by the Central Board that the extant ECF had met its objective of ensuring a resilient balance sheet for RBI, while maintaining healthy transfer of surplus to the government. Accordingly, it was decided to retain the broad principles underlying the extant ECF, with no major changes in risk assessment methodologies.”
Certain changes have, however, been made with the objective of further strengthening the framework to align it better with any emerging risks to the balance sheet of the RBI, it added. “The revised ECF provides requisite flexibility year-on-year to the Central Board in the maintenance of risk buffers, considering the prevailing macroeconomic and other factors, while also ensuring needed inter-temporal smoothening of the surplus transfer to the government,” the RBI stated.
The Jalan Committee was formed after a discord between the RBI and the government on the quantum of risk capital and transfers to the government came to the fore. The finance ministry starting late 2018 made its displeasure about the alleged over-cautiousness by the RBI public.
At that time, the ECF, developed in 2014-15 was in force, with an in-built degree of discretion with the RBI. During Urjit Patel’s tenure as governor, the RBI’s surplus transfer as % of its net disposable income dropped to 70-78%, against 100% during Raghuram Rajan’s tenure.
During the Covid period (FY20-FY22), the CRB was kept at the lower end of the ECF range at 5.5%, as the RBI sought to support growth and overall economic activity. It was increased to 6% for 2022-23 and to 6.5% for 2023-24, yet the transfers were high due to the strength of the RBI balance sheet.
Major sources of market risk faced by the RBI is are with regard to exchange rate, interest rate and gold prices. Unrealised gains/ losses on valuation of foreign currency assets (FCA) and gold are not taken to income account, but instead accounted for in a separate account. Net balance in this account varies with size of the asset base, its valuation, and movement in exchange rate and price of gold. CGRA thus provides a buffer against exchange rate and gold price fluctuations.
During Jalan Committee deliberations, some experts have pointed out gains arising from revaluation of foreign currency assets are unrealised (notional) and have not come out of profits generated by RBI. They said these therefore cannot be treated as free reserves eligible for distribution. Further, any utilisation of these funds also has consequences for inflation and money supply.