The Central Board of the Reserve Bank of India announced that it will transfer Rs. 99,122 crore as surplus to the Central Government for the accounting period of nine months ended March 31, 2021 (July 2020-March 2021). Every year RBI does the same. It transfers some amount to the Central Government.
Have you ever wondered that why RBI does so? Is it mandatory for RBI to give this amount to Central Government? And who decides the amount that will be transferred to the Central Government. You will get the answer to these questions in this post.
Why does RBI transfer its surplus to Central Government?
- The Reserve Bank of India transfers surplus to Central Government as per Section 47 of RBI Act 1934.
- The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Hence RBI derives all its power from the RBI Act.
- Section 47 of the Reserve Bank of India Act, 1934 titled “Allocation of surplus profits” makes it mandatory for the RBI to transfer all the surplus money it has earned during a year to the Central Government.
The exact wordings of Section 47 of RBI Act is mentioned below:
47. Allocation of surplus profits– After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds [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.]
What is the surplus of RBI?
The Reserve Bank of India has its Income and expenditure. The difference between the income and all its expenditures is what we know as the surplus of RBI. This is the amount that RBI has to transfer to the Central Government as per Section 47 of RBI Act.
Income of the Reserve Bank of India
Let us have look at the source of income of RBI. The Reserve Bank of India earns its major amount from interest (either from an Indian entity or a foreign entity).
(a) Interest (Domestic Sources)
(i) Interest on holding of Rupee Securities
(ii) Net Interest on LAF Operations
(iii) Interest on MSF Operations
(iv) Interest on Loans and Advances
(b) Interest (Foreign Sources)
(i) Interest Income from Foreign Securities
(ii) Net Interest on Repo / Reverse Repo Transactions
(iii) Interest on Deposits
Apart from this, RBI also earns from Exchange gain/loss from Foreign Exchange transactions.
Expenditure of the Reserve Bank of India
Some major expenditures of RBI are mentioned below:
- Employee Cost (Salary, PF etc)
- Printing of Notes
- Agency Commission (Commission paid to Agency Banks for conduct of government business on behalf of RBI)
So after deducting all its expenses from its income, the RBI pays the profit (surplus is the correct term) to the central government.
Who decides the amount of surplus?
So the amount of surplus is decided by the RBI after its balance sheet is finalized based on the income and expenses and its criteria of maintaining Contingency Risk Buffer.
Reference:
Reserve Bank of India Act 1934
Links:
RBI to transfer Rs. 99,122 crore surplus to Central Government for FY21