UPSC Key: Rupee depreciation, Available realised equity and Road dust

Key Points to Ponder:

• Know the evolution of India–US bilateral relations since the post-Cold War period.

• The US Secretary of State Marco Rubio visit to India-what are the highlights?

• The expansion of India–US strategic ties-what are the new components?

• Why people-to-people ties matter in India–US relations?

• What is the broader significance of Marco Rubio’s India visit?

• What is the significance of strategic autonomy in India’s foreign policy?

• Know the role of the Quad in the Indo-Pacific region.

• What are policy measures for strengthening India–US relations while preserving India’s strategic independence?

Key Takeaways:

• Rubio underlined that the changes “whether trade tariffs or visa curbs” were not targeted at India, but were being applied globally. Saying that the US was in the process of “modernising” its “migration system”, he said there may be “bumps” during this period of transition, but the “destination” would be a more efficient system. He also said the two sides were “on the verge” of winding up a trade agreement that would be “beneficial to both” and “sustainable”.

• Addressing a press conference with External Affairs Minister S Jaishankar, Rubio assured that the bilateral relationship between India and the US continues to be strong and has not lost any momentum. The two ministers held their bilateral meeting on Sunday, a day after Rubio met Prime Minister Narendra Modi.

• “There are only a handful of countries in the world that have both the economic and diplomatic power to be influential on strategic issues from a global perspective, and India is one of them, which is what adds the finishing touches on the importance of the strategic alliance…we have a strategic alliance between the US and India, it’s a strategic alliance between two countries that have global influence and the ability to influence global events, and that distinguishes it from other relationships,” Rubio said.

• Stating that the Indian government follows a “India First policy” just like the Trump administration’s “America First policy”, Jaishankar, who was calibrated in his comments, stuck to the “strategic partnership” line. “We have a strategic partnership which emanates from a convergence of national interests in many areas,” he said. He outlined issues of defence, energy, nuclear energy, critical minerals and the trade negotiations as part of the bilateral talks, apart from geopolitical issues in West Asia and the Indo-Pacific.

Do You Know:

• The two sides discussed strengthening their strategic partnership, with the focus on defence, security and economic cooperation. Key points from the bilateral talks include the renewal of the 10-year major defence partnership framework and the signing of a comprehensive underwater domain awareness roadmap.

• Raising the issue of visa curbs faced by Indians, Jaishankar said: “People-to-people ties are at the heart of our relationship. I apprised Secretary Rubio of challenges that legitimate travellers face in respect of visa issuance, while we cooperate to deal with illegal and irregular mobility. Our expectation is that legal mobility would not be adversely impacted as a consequence. After all, this is very relevant to our business, technology, and research cooperation.”

• Asked about the impact of the recent curbs on Indians travelling to the US, Rubio acknowledged the contribution that Indians have made to the US economy. “Over $20 billion has been invested in the US economy by Indian companies. We want that number to continue to increase, and obviously the expertise as well that they’ve provided into our economy has been very, very valuable,” he said.

Other Important Articles Covering the same topic:

📍Marco Rubio meets PM Modi, says US energy can diversify India’s supply

Previous year UPSC Prelims Question Covering similar theme:
1) With reference to the ‘Trans-Pacific Partnership’, consider the following statements: (UPSC CSE, 2016)
1. It is an agreement among all the Pacific Rim countries except China and Russia.
2. It is a strategic alliance for the purpose of maritime security only.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

The Editorial Page

The rupee problem this time is different. The solution must be, too

Preliminary Examination: Economic and Social Development

Mains Examination: General Studies III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

What’s the ongoing story: Sajjid Z. Chinoy Writes-Three months into the West Asia conflict, India has done well to avoid widespread energy shortages. Furthermore, the burden sharing of higher energy prices between the public and private sector has begun.

Key Points to Ponder:

• What is Currency depreciation?

• What do you understand by Rupee depreciation?

• Appreciation vs Depreciation of Currency-Compare and Contrast

• What is Devaluation of Currency? Depreciation and Devaluation both are same?

• What are the reasons for Current Depreciation of Indian Rupee?

• What will be the impact, and will exporters benefit?

• Why settling trade in domestic currency particularly useful during periods of rupee depreciation?

• What is Vostro accounts in rupee trade settlement?

• What is the difference between Vostro and Nostro account?

• What are the key limitations of rupee-based trade settlement?

• How rupee trade settlement can help reduce external sector vulnerabilities?

• What is Foreign Direct Investment?

• Why Government eased FDI approval norms amid rising competition from China?

• How does liberalisation of FDI approvals influence global investor confidence in emerging economies?

• Why is ease of doing business closely linked with FDI inflows?

Key Takeaways:

• Retail prices are being raised but will need to be raised further to elicit the necessary behavioural response from households and firms.

• Instead, the key pressure point remains the Balance of Payments and the Rupee. But there are two unique elements this time-
First, pressures have long pre-dated the West Asia conflict. For the first time in decades, the Balance of Payments has been in deficit for two consecutive years and we are on course for a third successive deficit. This suggests a more chronic underlying phenomenon that needs to be addressed.
Second, pressures are emanating from the capital account, not the current account. In past episodes there was a prototypical evolution: the Current Account Deficit (CAD) widened, became more dependent on fickle capital inflows to finance it which ultimately dried-up.

• The current account deficit has remained very benign — averaging less than 1 per cent of GDP over the last three years. Instead, pressures have been driven squarely by the capital account. Capital inflows — which used to average 2.5 per cent of GDP pre-pandemic — have consistently slowed since 2023, completely dried up in 2025 and have exerted pressure on the Rupee.

• Making the analytical distinction between the capital and current account as the source of pressures is crucial to formulating the right response.

• In turn, a collapse in FDI is at the heart of the capital flow story, with net FDI – which used to average 1.5 per cent — completely drying up since 2024.

Do You Know:

• Between 2010 and 2025, India’s net FDI is strongly correlated with US 10 Year Treasuries — a proxy for global financial conditions. When yields are low India tends to get a gush of FDI; when yields have hardened — like the last two years — net FDI has completely dried up.

• Recall, FDI is typically governed by both (global) “push” and (country-specific) “pull-factors.” India’s FDI has largely been governed by push factors since 2010. The last time it was driven by India-specific pull-factors was in 2005-10 when a strong corporate capex cycle catalysed FDI. In contrast, Vietnam has consistently been able to attract above 4 per cent of GDP in FDI irrespective of global financial conditions.

• The first line of defense is to let the Rupee depreciate — as policymakers have correctly done -to act as a shock absorber. A weaker Rupee will disincentivise imports, improve export competitiveness and thereby simultaneously narrow the CAD and boost domestic activity (“expenditure switching”). Theoretically, too, a sharp slowdown in FDI compounded by a large negative terms-of-trade shock from crude prices would argue for a much more depreciated equilibrium exchange rate.

Other Important Articles Covering the same topic:

📍How long-term bet on rupee saved Rs 14,000 crore of forex in February

Previous year UPSC Prelims Question Covering similar theme:
2) With reference to the Indian economy, consider the following statements: (UPSC CSE, 2022)
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

The Ideas Page

India faces a 1991 moment: it needs to reform, relook at subsidies

Preliminary Examination: Economic and Social Development

Mains Examination: General Studies III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

What’s the ongoing story: Ashok Gulati, Ritika Juneja Writes- Prime Minister Narendra Modi has called for austerity measures, and some chief ministers have reportedly travelled on motorcycles, metros, and electric cars. Such tokenism does not last long.

Key Points to Ponder:

• What was the main reason for the 1991 economic crisis in India?

• What are the key points of economic reforms of 1991?

• What you know about fertilizer subsidies?

• What were the challenges associated with fertilizer subsidy reforms in India?

• What can be the implications of rising subsidy burdens on India’s macroeconomic stability?

• “The technical blueprint of economic reforms is not difficult to prepare, but what is required is the political will to undertake such reforms”-Analyse

• “The culture of distributing freebies, at the central as well as the state level, is now deeply entrenched”-discuss

Key Takeaways:

• The Indian rupee continues to weaken against the US dollar. If the RBI does not intervene decisively, the exchange rate could well slide to Rs 100 per US dollar. To stabilise the rupee, the RBI may need a war chest of at least $50–60 billion, and even that would provide only temporary relief. The underlying causes of the crisis lie largely beyond the RBI’s control.

• The crisis in the Middle East is finally hitting India pretty hard. Energy and fertiliser costs have almost doubled. The recent increase in petrol prices by around Rs 3-4 per litre is only a partial pass-through of global prices. Similar under-pricing exists in LPG, LNG, and fertilisers, especially urea. These pressures are likely to widen the fiscal deficit beyond 5 per cent of GDP.

• Foreign portfolio investors are losing interest in India and withdrawing their investments. Domestic investors are equally worried and are not coming forward to invest big. The IMD has forecast a strong El Niño. As a result, the Indian economy is losing momentum. Our calculation, based on today’s conditions, is that in the current financial year (FY27), India will be lucky to clock 6 per cent GDP growth and contain Consumer Price Index (CPI) inflation below 6 per cent. If the Strait of Hormuz remains closed for another three months, GDP growth will fall below 6 per cent, and CPI inflation will shoot above 6 per cent — the upper band of the RBI for inflation control.

• The RBI will not have much choice but to raise the repo rates soon, triggering the northward movement of all interest rates. The economy seems to be on the brink of a major crisis. The only rational way to avoid this is to carry out major reforms, similar to those in 1991.

Do You Know:

• Farmers buy fertilisers at MRPs (maximum retail price) below their normal supply-and-demand-based market rates or what it costs to produce/import them.

• The MRP of neem-coated urea, for instance, is fixed by the government at Rs 5,922.22 per tonne, whereas its average cost-plus price payable to domestic manufacturers and importers comes to around Rs 17,000 and Rs 23,000 per tonne, respectively. The difference, which varies according to plant-wise production cost and import price, is footed by the Centre as subsidy.

• The MRPs of non-urea fertilisers are decontrolled or fixed by the companies. The Centre, however, pays a flat per-tonne subsidy on these nutrients to ensure they are priced at “reasonable levels”. The per-tonne subsidy is currently Rs 10,231 for di-ammonium phosphate (DAP), Rs 6,070 for muriate of potash (MOP) and Rs 8,380 for the popular ‘10:26:26’ complex fertiliser, with their corresponding average MRPs at Rs 24,000, Rs 17,500 and Rs 23,500 per tonne, respectively.

• The subsidy goes to fertiliser companies, although its ultimate beneficiary is the farmer who pays MRPs less than the market-determined rates. Companies, until recently, were paid after their bagged material had been dispatched and received at a district’s railhead point or approved godown.

Other Important Articles Covering the same topic:

📍Explained: How fertiliser subsidy works

Previous year UPSC Prelims Question Covering similar theme:
3) In India, in the overall Index of Industrial Production, the Indices of Eight Core Industries have a combined weight of 37.90%. Which of the following are among those Eight Core Industries? (UPSC CSE, 2012)
1. Cement
2. Fertilizers
3. Natural Gas
4. Refinery products
5. Textiles
Select the correct answer using the codes given below
(a) 1 and 5 only
(b) 2, 3 and 4 only
(c) 1, 2, 3 and 4 only
(d) 1, 2, 3, 4 and 5

Explained

The 4-Letter word that Everyone in Delhi needs to know Delhi’s killer Dust

Mains Examination: General Studies III: Conservation, environmental pollution and degradation, environmental impact assessment.

What’s the ongoing story: It is persistent, it lingers in the air. It is inhaled deep into the lungs, it even enters the bloodstream. And it carries toxic metals that can trigger disease, damage lungs, and raise cancer risk, especially among children.

Key Points to Ponder:

• What is ‘road dust’?

• Why particulate matter is considered harmful?

• What is “resuspension” of particulate matter?

• Why air pollution is considered a public health challenge?

• Why road dust is becoming increasingly important in urban pollution studies?

• Does road dust included in urban environmental governance?

• What is the relationship between urbanisation and pollution?

• Why Delhi pollution is always in News?

• Know the Geographical location of Delhi

• Being landlocked makes Delhi’s air pollution worse-How far you agree with this?

• Know the Supreme Courts Judgments on Delhi Air Pollutions.

Key Takeaways:

• Meet road dust — the main villain in Delhi’s pollution story that is quietly putting your life at risk, every day.

• A January 2026 report by a panel of top experts constituted by the Commission for Air Quality Management (CAQM) identified road dust as a major pollution source in Delhi because it acts as “both a primary emission and a persistent source”. The panel defined road dust broadly to include airborne dust from roads and shoulders, vehicle movement, dry soil, and road wear. It said poor road surfaces, potholes, broken edges, unpaved stretches, road-tyre-brake wear, and debris falling from the transport of construction and demolition (C&D) material all contribute to the dust load.

• The report also underlined the mechanism that makes road dust difficult to control: dust deposited on road surfaces is resuspended by vehicular movement, particularly during dry conditions. This keeps pollution levels elevated even in the absence of active dust-generating activities.

• Mohammed Rafiuddin, Programme Lead for Clean Air at the Council on Energy, Environment and Water (CEEW), said, “Scientifically, road dust is a very different kind of source compared to C&D dust. It is a line source (spread along a corridor), but at a construction site, the dust generated is from a point source.” In other words, road dust requires corridor-wide, routine removal and surface management, while construction dust depends on site-level containment and enforcement.

• A road-dust committee set up by the CAQM last year said resuspension is driven by continuous dust deposits along road edges and medians, unsuitable road infrastructure design, poor maintenance, and inadequate dust-management practices.

• The committee noted that dust from unpaved medians frequently blows onto carriageways. Irrigation practices can further worsen the problem, as thick hose pipes used for watering median and footpath plantations often spill soil onto roads, which later dries and adds to dust levels. Encroachments and unauthorised parking were also flagged as operational barriers that obstruct cleaning and allow dust to accumulate.

Do You Know:

• Evidence suggests that road dust is becoming relatively more important as exhaust emissions decline. A multi-city 2023 study led by researchers from IIT Delhi found that even as tailpipe emissions fall with cleaner fuels, non-exhaust sources such as “resuspendable road dust, tyre wear and brake wear” are gaining significance.
The study showed that Delhi’s higher silt load is driven by construction activity, heavy traffic, and dust storms during April and May. Across 32 cities, silt loads ranged from 0.2 g/m² to 111.2 g/m², with Delhi averaging 14.47 g/m².
Researchers also pointed out that the degradation of the Aravalli range has weakened a natural dust barrier around Delhi, allowing more wind-blown dust to enter the city. Nationwide, the study said, exposure to road dust is linked to more than 10,207 premature deaths annually.

• Experts say Delhi’s natural environment places it at a disadvantage. Rafiuddin said that even with improved road conditions, “there is bound to be some amount of dust always”, which then needs to be actively removed and managed. This is due to the city’s natural baseline for dust from dry summers, frequent dust storms, loose alluvial soil, and relatively low rainfall.
Some commonly used mitigation measures offer limited benefits. Dipankar Saha, former head of the air laboratory at the Central Pollution Control Board, who led a 2017 pilot study on the efficacy of anti-smog guns, said such measures are ineffective for dust control.

• Road dust is a major source of PM2.5 and PM10, the fine particles that can penetrate deep into the lungs and enter the bloodstream. Inhaling these particles can cause lung irritation and inflammation, and worsen pre-existing conditions such as asthma and chronic obstructive pulmonary disease, often leading to persistent coughing and wheezing. Long-term exposure to PM2.5 has been linked to premature death, particularly among people with chronic heart or lung disease, and to reduced lung function growth in children.

Other Important Articles Covering the same topic:

📍Delhi’s Killer Dust: Road sweeper fleet 80% short, they barely scratch the surface

Previous year UPSC Prelims Question Covering similar theme:
4) In the cities of our country, which among the following atmospheric gases are normally considered in calculating the value of Air Quality Index? (UPSC CSE, 2016)
1. Carbon dioxide
2. Carbon monoxide
3. Nitrogen dioxide
4. Sulfur dioxide
5. Methane
Select the correct answer using the code given below:
(a) 1, 2 and 3 only
(b) 2, 3 and 4 only
(c) 1, 4 and 5 only
(d) 1, 2, 3, 4 and 5

DRDO’s new missile offers precision strikes, anti-drone combat

Main Examination: General Studies III: Achievements of Indians in science & technology; indigenization of technology and developing new technology.

What’s the ongoing story: Earlier this week, the Defence Research and Development Organisation (DRDO) successfully carried out final development trials of the UAV-Launched Precision Guided Missile (ULPGM)-V3, paving the way for its critical user trials by the armed forces.

Key Points to Ponder:

• The UAV-Launched Precision Guided Missile (ULPGM)-V3-Know its features

• What are precision-guided missiles?

• What is fire-and-forget” capability?

• What is the significance of indigenous defence development?

• Why drones are increasingly central to modern warfare?

• How drones are game changer in modern warfare?

• What is the history of missile technology in India?

• What kind of missiles does India have?

• Which of India’s missile systems are most important?

• What about hypersonic technology?

• What makes India good in missile technology?

• Where do China and Pakistan stand compared to India?

Key Takeaways:

• The DRDO on Tuesday (May 19) completed the final deliverable configuration development trials of the ULPGM-V3 in both air-to-ground and air-to-air modes at DRDO’s National Open Area Range test range in Kurnool, Andhra Pradesh. The trials were carried out using an integrated ground control system (GCS) to command and control the ULPGM weapon system.

• The GCS features state-of-the-art technologies to automate readiness and launch operations. While the final development trials will be followed by user trials by the armed forces, the term “deliverable configuration” suggests that not much will change in the subsequent trials.

• A DRDO scientist said that compared with the earlier ULPGM-V1 and V2 variants, the ULPGM-V3 represents a significant advancement in India’s indigenous drone-launched missile capability.

• The V1 was a basic free-fall precision missile and the V2 introduced propulsion, longer range, and mid-course target updates. The V3 adds the ability to engage both ground and aerial targets, including drones and helicopters. It also features more advanced target-seeking systems, improved day-and-night combat capability, and multiple warhead options for different battlefield roles, making it a far more versatile weapon for modern drone warfare.

Do You Know:

• The ULPGM-V3 is fitted with a high-definition dual-channel seeker, an advanced guidance system using multiple sensors to accurately track targets — allowing it to strike a wide range of threats. The missile can be deployed in both plains and high-altitude regions and is capable of operating during both day and night. It is also equipped with a two-way data link, enabling operators to change or update the target even after the missile has been launched.

• The missile can be fitted with three different types of warheads depending on the mission. These include an anti-armour warhead designed to destroy heavily protected tanks and armoured vehicles — even those fitted with rolled homogeneous armour and explosive reactive armour which are special layers of protection used in modern battle tanks. It also has a penetration-cum-blast warhead meant to pierce and destroy bunkers and fortified structures, and a pre-fragmentation warhead that disperses high-speed metal fragments over a large area to maximise damage. The missile can engage both stationary and moving targets with precision in all-weather, day-and-night combat conditions.

• DRDO has partnered with two production agencies — the public sector company Bharat Dynamics Limited and the private sector firm Adani Defence Systems and Technologies Limited — for the development and production of the missiles.

• The system has been integrated on unmanned aerial vehicles (UAVs) developed by Newspace Research and Technologies, Bengaluru, for current trials. DRDO is actively pursuing integration of ULPGM weapons with long-range and high endurance UAVs from several other Indian companies.

• The ULPGM missile has been developed by Research Centre Imarat, Hyderabad as the nodal lab along with other DRDO laboratories, namely Defence Research and Development Laboratory, Hyderabad; Terminal Ballistics Research Laboratory, Chandigarh; and High Energy Materials Research Laboratory, Pune.

Other Important Articles Covering the same topic:

📍DRDO tests combustor of new hypersonic cruise missile

Previous year UPSC Prelims Question Covering similar theme:
5) Consider the following statements: (UPSC CSE, 2023)
1. Ballistic missiles are jet-propelled at subsonic speeds throughout their flights, while cruise missiles are rocket powered only in the initial phase of flight.
2. Agni-V is a medium-range supersonic cruise missile, while BrahMos is a solid-fuelled intercontinental ballistic missile.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Amid tighter Green Card rules in the US, why Indians could be uniquely affected

Mains Examination: General Studies II: Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.

What’s the ongoing story: On Friday (May 22), the US moved to significantly restrict who can obtain permanent residency in the country, rattling the lakhs of Indians on temporary visas who are awaiting a Green Card.

Key Points to Ponder:

• What is Green Card?

• The Donald Trump-led US administration has announced certain changes for the Green Card-what are those?

• What is the significance of skilled migration in the India–US relationship?

• What is the difference between Adjustment of Status and Consular Processing in immigration systems?

• Know the role of the Indian diaspora in strengthening India–US relations.

• What can be the long and short term implications of restrictive immigration policies for skilled labour mobility?

• What exactly has changed for Indians waiting for Green Cards?

• Why is this particularly alarming for Indians?

• What happens if Indians are pushed to return home to apply for Green Cards?

Key Takeaways:

• The US Department of Homeland Security, which oversees the US Citizenship and Immigration Services (USCIS), announced that those applying for Green Cards must return to their home countries to do so — a sweeping reversal of a practice in place for over half a century.

• People can apply for Green Cards in two ways — going to a US consulate abroad, or applying for one while already in the US, which is called an “adjustment of status”.

• The new USCIS policy memo targets the second, more popular route, used for decades by Indian workers on H-1B visas, students transitioning from F-1 to work visas, and spouses on H4 dependent visas.

• The new policy is especially concerning for Indians because they dominate the decades-long backlog in employment-based Green Card categories such as EB-2 and EB-3. For many Indian professionals, the wait stretches beyond 15 or even 20 years.

Do You Know:

• The USCIS green card policy was not the only setback for Indians in the US. The US State Department announced on the same day that green cards for Indians under the Employment-Based Second Preference (EB-2) category had been exhausted for the financial year ending September 2026.

• While there are approximately 1.5 million Indian Green Card holders in the US, an additional 1.2 million highly skilled Indian nationals and their dependents are estimated to be presently stuck in the employment-based Green Card backlog. Every year, tens of thousands of new Green Cards are issued to Indian nationals, positioning India as the second-largest country of origin for new permanent residents.

Other Important Articles Covering the same topic:

📍Trump’s green card rule explained: What it means for visa holders in the US

Previous year UPSC main Question Covering similar theme:
📍The Indian diaspora has a decisive role to play in the politics and economy of America and European Countries’. Comment with examples. (UPSC CSE, GS2, 2020)

Economy

Cut in RBI’s risk buffer raised dividend to Centre by Rs 92K cr

Preliminary Examination: Economic and Social Development

Mains Examination: General Studies III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

What’s the ongoing story: The central board of the Reserve Bank of India (RBI) on Friday approved the transfer of a record Rs 2.87 lakh crore to the Centre as surplus — or dividend — for 2025-26. But it would have been much lower had the board not reduced a key risk buffer to 6.5% from 7.5%.

Key Points to Ponder:

• What is Available Realised Equity (ARE)?

• What do you understand by ‘RBI dividend’ or ‘RBI surplus’?

• What are the rules regarding payment of dividend?

• How does RBI pay dividend to government?

• How much excess does RBI have now?

• Why RBI gives dividend to government?

• How does the RBI earn profits?

• What is the dividend pay-out ratio for RBI?

• How does a central bank like the RBI make profits?

• What is the nature of the arrangement between the government and RBI on the transfer of surplus or profits?

• Does the RBI pay tax on these earnings or profits?

• What is Economic Capital Framework (ECF)?

• What exactly Bimal Jalan Committee said on Economic Capital Framework (ECF)

Key Takeaways:

• The RBI said its board decided to keep the Contingent Risk Buffer (CRB) at 6.5% of the central bank’s balance sheet – which expanded 20.6% in 2025-26 to Rs 91.97 lakh crore — “taking into consideration the current macroeconomic factors, financial performance of the Bank and maintenance of appropriate risk buffers”. According to calculations by The Indian Express, had the CRB been maintained at the 2024-25 level of 7.5%, the dividend to the Centre would have been around Rs 92,000 crore lower at Rs 1.95 lakh crore.

• When the CRB is lowered, the amount the RBI must transfer to its Contingency Fund – a rainy-day fund meant to meet unexpected and unforeseen contingencies, including depreciation in the value of securities the central bank holds, risks arising out of monetary and exchange rate policy operations, and systemic risks – decreases. This raises the dividend payable to the Centre.

• Last year, the RBI had internally reviewed its Economic Capital Framework and the board approved widening the CRB range to 4.5-7.5% of the balance sheet from the 5.5-6.5% recommended in 2019 by an expert committee led by former governor Bimal Jalan.

• The Economic Capital Framework provides a rule-based system for the provisions the RBI must make against the risks it faces. These provisions are to be made from the revenue it generates in the normal course of its operations and after it has met its expenses. The Contingent Risk Buffer, or CRB, comprises the RBI’s provisions to cover any potential risks — be it credit, operational, financial, or related to monetary stability — and is the proportion of the balance sheet that must be set aside as a buffer.

Do You Know:

• Over the years, the RBI’s dividend has become an increasingly important source of income for the government and now makes up around 8% of its revenue receipts, up from around 5% a decade ago. And the increase in the dividend due to the lowering of the CRB to 6.5% will be an enormous source of relief to the government whose finances have been stretched by the West Asia war: a rise in the fertiliser subsidy bill, a hit to tax collections because of cuts to the reduction in excise duty on petrol and diesel, and likely lower dividends from public sector oil marketing companies who are incurring heavy losses.

• This is the first time the RBI’s board has ever reduced the CRB and comes after it was raised three years in a row. When the CRB is raised – as it was in 2022-23, 2023-24, and 2024-25 — the amount the RBI must transfer to the Contingency Fund increases. This reduces the dividend the Centre gets.

• In 2024-25, the RBI’s balance sheet grew to Rs 76.25 lakh crore; 7.5% of this is equal to Rs 5.72 lakh crore, which was maintained across the various funds of the central bank: the Contingency Fund, Asset Development Fund, capital, and Reserve Fund. These four together make up the RBI’s Available Realised Equity (ARE). ARE divided by the size of the balance sheet is equal to the CRB.

Other Important Articles Covering the same topic:

📍Rs 2.86 lakh cr: RBI clears record surplus transfer to Centre

Previous year UPSC Prelims Question Covering similar theme:
6) If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (UPSC CSE, 2020)
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

 

PRELIMS ANSWER KEY

1.(d)  2.(c)  3.(c)  4.(b) 5.(d) 6.(b)

  

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