What are RBI’s surplus funds, where do reserves come from?

NEW DELHI: The Reserve Bank of India's (RBI’s) board on Monday approved a record surplus transfer of Rs 1.76 lakh crore to the government. A large part of this (Rs 1.23 lakh crore) was surplus for the year and the remaining (Rs 52,637 crore) was from surplus reserves.

What is the size of RBI’s balance sheet?
In 2017-18, the size of RBI’s balance sheet was Rs 36.2 lakh crore. Its balance sheet, however, is unlike that of a company. The currency notes it prints make up more than half its liabilities. Another big share, 26%, represents its reserves. These are invested mainly in foreign and Indian government securities (essentially promissory notes bearing an interest rate against which these governments borrow) and gold.


The RBI holds a little over 566 tons of gold, which along with its forex assets make up almost 77% of its assets. Sometimes, the finance ministry and the RBI disagree on what level of reserves the RBI must hold to be consistent with its operations.

Where do the RBI’s reserves come from?
Reserves with the RBI are not all of the same kind. There are two types which are relevant: The Currency & Gold Revaluation Account (CGRA) makes up the biggest share — it was Rs 6.9 lakh crore in 2017-18. This represents the value of the gold and foreign currency that the RBI holds on behalf of India.

Simply put, variations in this represent the changing market value of these assets. Thus, the RBI notionally gains or loses on this count according to market movements. For example, last year the CGRA increased by 30.5% largely because of the depreciation of the rupee against the US dollar and due to an increase in the price of gold.

The Contingency Fund (CF) is a specific provision meant for meeting unexpected contingencies that arise from RBI’s monetary policy and exchange rate operations. In both cases, the RBI intervenes in the relevant markets to adjust liquidity or prevent large fluctuations in currency value. The CF in 2017-18 was Rs 2.32 lakh crore, or 6.4% of assets. The CGRA and CF put together constituted 26% of assets (and because in a balance sheet assets and liabilities must by definition match, also the same proportion of its liabilities).

What is the RBI’s surplus?
This represents the amount RBI transfers to the government. There are two unique features about RBI’s financial statements. It is not required to pay income tax and has to transfer to the government the surplus left over after meeting its needs. RBI’s income comes mainly through interest on the securities it holds and in 2017-18 the largest component of expenditure was a provision of about Rs 14,200 crore it made to the contingency fund.

Obviously, the larger the provision made to CF, the lower the surplus. Beginning 2013-14, RBI didn’t make a provision to CF for three successive years as a technical committee felt its “buffers” were more than enough. In the last two years, however, RBI has made provisions to CF. The adequacy of the current level of CF is one of the key issues likely to be debated extensively by the expert committee.

What has been done now?
The record surplus is because last year the RBI intervened in both markets — the forex markets where it sold dollars at a huge profit and the money markets where it conducted record open market operations (buying bonds), which earned it interest. Also, the Bimal Jalan panel has recommended an Economic Capital Framework for the RBI (similar to capital adequacy requirement for commercial banks). Based on this formula, the RBI has more capital than what it would need in a worst-case stress test scenario. This surplus capital of Rs 52,637 crore has been transferred to the government.