Knowledge Nugget | RBI’s surplus transfer to govt: All you need to know for UPSC Exam

Why in the news?

The Board of the Reserve Bank of India (RBI) on May 23 approved a record surplus transfer, or dividend, of Rs 2.69 lakh crore to the Central Government for the accounting year 2024-25. It followed a meeting of the central board of directors of the RBI on May 15. The board reviewed the Economic Capital Framework (ECF), which is used to determine risk provisioning and surplus distribution by the central bank to the government. In 2023-24, the RBI had transferred the surplus of Rs 2.11 lakh crore.

Unlike the banks it regulates, the RBI isn’t a company that announces a dividend. In this context, it becomes essential to understand that how does the transfer of RBI’s surplus work out and what are the functions of RBI.

Key Takeaways :

1. The RBI as a central bank is not only mandated to keep inflation or prices in check through monetary policy, but it is also supposed to manage the borrowings of the Government of India and state governments; supervise or regulate banks and non-banking finance companies; and manage the currency and payment systems.

2. While carrying out these functions or operations, the RBI registers profits. Generally, the central bank’s income comes from the:

(i) Returns earned on its foreign currency assets, which could be in the form of bonds and treasury bills of other central banks or top-rated securities, and deposits with other central banks.

(ii) Interest on its holdings of local rupee-denominated government bonds or securities, and while lending to banks for very short tenures, such as overnight.

(iii) It claims a management commission on handling the borrowings of state governments and the central government.

3. Its expenditure is mainly on the printing of currency notes and staff, besides the commission it gives to banks for undertaking transactions on behalf of the government across the country, and to primary dealers, including banks, for underwriting some of these borrowings.

Arrangement between the government and RBI on the transfer of surplus 

1. The RBI isn’t a commercial organisation like the banks or other companies that are owned or controlled by the government – it does not, as such, pay a “dividend” to the owner out of the profits it generates.

2. Although the RBI was promoted as a private shareholders’ bank in 1935 with a paid-up capital of Rs 5 crore, the government nationalised it in January 1949, making the sovereign its “owner”.

3. What the central bank does, therefore, is transfer the “surplus” – that is, the excess of income over expenditure – to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934:

After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation fund [and for all other matters for which] provision is to be made by or under this Act or which are usually provided for by bankers, the balance, of the profits shall be paid to the Central Government.

4. The Central Board of the RBI does this in early August, after the July-June accounting year is over.

Malegam committee

1. In 2013, a technical committee of the RBI Board, headed by Y. H. Malegam, reviewed the adequacy of reserves and a surplus distribution policy and recommended a higher transfer to the government.

2. Earlier, the RBI transferred part of the surplus to the Contingency Fund, to meet unexpected and unforeseen contingencies, and to the Asset Development Fund, to meet internal capital expenditure and investments in its subsidiaries, in keeping with the recommendation of a committee to build contingency reserves of 12% of its balance sheet.

3. But after the Malegam committee made its recommendation, in 2013-14, the RBI’s transfer of surplus to the government as a percentage of gross income (less expenditure) shot up to 99.99% from 53.40% in 2012-13.

BEYOND THE NUGGET: Monetary Policy Committee (MPC)

1. Under Section 45ZB of the amended RBI Act, 1934, the central government is empowered to constitute a six-member Monetary Policy Committee to determine the policy interest rate required to achieve the inflation target. The first such MPC was constituted on September 29, 2016.

2. Section 45ZB lays down that “the Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target”, and that “the decision of the Monetary Policy Committee shall be binding on the Bank”.

3. The MPC fixes the benchmark interest rate — or the base or reference rate that is used to set other interest rates — in India. The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.

4. Section 45ZB says the MPC shall consist of the RBI Governor as its ex officio chairperson, the Deputy Governor in charge of monetary policy, an officer of the Bank to be nominated by the Central Board and three persons to be appointed by the central government. The last category of appointments must be from “persons of ability, integrity, and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy”. (Section 45ZC)

5. Notably, each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote.

Post Read Questions

(1) Which of the following are the sources of income for the Reserve Bank of India? (UPSC CSE 2025)

I. Buying and selling Government bonds

II. Buying and selling foreign currency

III. Pension fund management

IV. Lending to private companies

V. Printing and distributing currency notes

Select the correct answer using the code given below.

(a) I and II only

(b) II, III and IV

(c) I, III, IV and V

(d) I , II and V

(2) With reference to the Monetary Policy Committee (MPC), which of the statements given below is/are correct?

1. The MPC is required to meet at least four times in a year.

2. It determines the policy repo rate required to achieve the inflation target.

3. There is no quorum for the MPC meeting.

4. It is an eight-member committee fully constituted by the Reserve Bank of India.

Select the correct answer using the codes given below:

(a) 1, 2 and 3

(b) 3 and 4 only

(c) 1 and 2 only

(d) 2 and 4 only

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