DIVIDENDS FROM RBI -
ECONOMY
News: RBI board approves transfer of
₹2,10,874 crore surplus to Centre for FY24
What's in the news?
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The Central Board of the Reserve Bank of India
(RBI) approved a highest-ever surplus
transfer/ dividend of Rs 2.11 lakh crore to the Central government for the
accounting year 2023-24.
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The transferable surplus for the year (2023-24) has
been arrived at on the basis of the Economic Capital Framework (ECF).
Economic Capital
Framework (ECF):
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The ECF provides a methodology for determining the appropriate level of risk provisions
and profit distribution to be made under Section 47 of the RBI Act 1934.
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As per this provision, the central bank is required
to pay the balance of its profits to the central government after making
provision for bad and doubtful debts, depreciation in assets, and contributions
to staff.
Old ECF:
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The old ECF was developed in 2014-15, and was
operationalised in 2015-16.
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In order to propose a suitable surplus distribution
policy, the RBI had constituted an Expert Committee (Chair: Dr Bimal Jalan) to
review the current economic capital framework, in 2018.
Revised ECF:
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The RBI adopted (on August 26, 2019) a revised ECF as per the recommendations of the Bimal
Jalan Committee and this framework may be reviewed every five years.
Surplus Distribution
Policy of the Revised ECF:
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The previous surplus distribution policy targets
only the total economic capital.
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Economic capital of a central bank includes its capital, reserves,
risk provisions and revaluation balances.
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However, the Expert Committee recommended that the
target should also include realised
equity.
○
Realised equity is the component of RBI’s economic
capital comprising its capital, reserve fund and risk provisions.
The Committee had recommended that
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The total
economic capital should be maintained between 20.8% to 25.4% of the RBI’s
balance sheet.
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The risk
provisioning under the Contingent Risk Buffer (CRB) should be maintained
within a range of 5.5-6.5% of the RBI’s balance sheet.
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The risk provisioning made from economic capital to
cover monetary, fiscal stability, credit and operation risks is cumulatively
referred to as the CRB.
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The CRB is the country’s savings for a financial
stability crisis, which has been consciously maintained with the RBI in view of
its role as Lender of Last Resort.
Important Takeaways from
the Recommendations:
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If the realised
equity is above the required levels, the entire net income of RBI will be
transferred to the government.
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If it is lower, risk provisioning will be made to
the necessary extent and only the residual net income will be transferred.
Surplus Transfer by the
RBI to the Central Government:
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The Central Board of Directors of the RBI approved
the transfer of Rs 2,10,874 crore as surplus to the Central Government for the
accounting year 2023-24.
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The latest transfer by the central bank is more
than double the ₹87,416 crore that the RBI had transferred in FY23.
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The RBI Board also decided to increase the CRB to 6.50% for 2023-24, from
6% in the previous year, as the economy remains robust and resilient.
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In the Interim Budget for FY2025, the government
had set an ambitious target of bringing down the fiscal deficit target to 5.1%
of GDP in FY25 from 5.8% of GDP in FY24.
○
The bumper dividend payout is likely to help ease
FY25 fiscal deficit by around 0.2% of the GDP amid potential shortfall in
disinvestment receipts and moderate tax collection growth than budgeted.
Reasons for the Higher
Dividend Transfers to the Government:
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The higher dividend (representing additional fiscal
revenue of 0.4% of GDP) to the government is partly because of an increase in the revenue of the RBI from the
variable repo rate (VRR) auctions.
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These auctions were conducted by the RBI last year
to provide banks funding support amid tight liquidity conditions.
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The revaluation
gains on forex reserves, higher
interest rates on domestic and foreign securities and significantly higher
gross sales of foreign exchange can also be attributed to the RBI’s higher
dividend to the government.
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The RBI normally pays the dividend from the surplus
income it earns on investments and valuation changes on its dollar holdings and
the fees it gets from printing currency.
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The rupee’s depreciation against the dollar has
also led to the surplus transfer.