The Reserve Bank of India (RBI) has recently emerged in the spotlight for approving an impressive transfer of surplus funds to the Union Government. This decision, which will greatly enhance the fiscal position, involves a total sum of Rs 87,416 crore for the accounting year of 2022-23. Compared to the surplus transfer of the previous year, this marks an increase of 188%.
Factors Contributing to the Boost in Surplus Transfer
A multitude of reasons have contributed to this surge in the surplus transfer. A significant portion is due to higher dividends generated from public sector banks and oil marketing companies. An increase in earnings from investments, as well as changes in the valuation of dollar holdings, also played a pivotal role. Other contributing factors include the revaluation of forex assets, adjustments in reserves conforming to the Bimal Jalan Committee recommendations, and fees received for printing currency. Furthermore, the depreciation of the rupee against the dollar has impacted the surplus transfer, along with higher rates on the surplus distribution framework resulting in bigger payouts. Last but not least, higher earnings achieved from the sale of foreign exchange and investments in US treasuries also boosted the surplus transfer.
Implications of the Surplus Transfer
This surplus transfer will have numerous implications, the first being a considerable relief for the government’s fiscal situation. Amid the uncertainty associated with the divestment program, this surplus transfer can assist in managing fiscal numbers, compensate for potential shortcomings in tax buoyancy, and enhance other revenue sources. Tax buoyancy refers to the phenomenon where revenue increases without a corresponding hike in the tax rate. Additionally, the surplus can serve as a fiscal buffer that supports budget targets.
The Impact of Surplus Transfer on the Disinvestment Program
Another implication of the surplus transfer involves the disinvestment program. The surplus can aid in counterbalancing potential losses from lower disinvestments, telecom payouts, or tax revenues. This, in turn, amplifies the government’s capacity to manage fiscal deficits more effectively.
Implications for Liquidity and Monetary Policy
Surplus transfer is also expected to have implications for liquidity and monetary policy. Dividend inflows and a seasonal decrease in currency demand are projected to ease frictional liquidity in the near term. However, tight liquidity conditions may persist in the future, prompting the RBI to conduct open market operations worth Rs 1.5 lakh crore in the second half of FY24.
RBI’s Modus Operandi for Generating Surplus
RBI generates surplus primarily through several income sources. These include the interest on holdings of domestic and foreign securities, fees, and commissions obtained from its services, profits from foreign exchange transactions, and returns from subsidiaries and associates. On the expenditure side, there are costs associated with the printing of currency notes, payment of interest on deposits and borrowings, salaries and pensions of staff, operational expenses of offices and branches, and provisions for contingencies and depreciation. The difference between RBI’s income and expenditure is the surplus, which, after making provisions for reserves and retained earnings, is transferred to the government as per Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934. A committee led by Y H Malegam in 2013, which reviewed the adequacy of reserves and surplus distribution policy, recommended a higher transfer to the government.
