Ajit Ranade: Why India’s central bank should not turn into a fiscal stabilizer for the government

Meanwhile, RBI’s balance sheet expanded at a pace commensurate with that of nominal GDP and money supply. Even today, it is barely 25% of GDP. So India’s monetary expansion has largely been organic and reserve-backed, not reckless ‘money printing’ disconnected from economic growth. It is driven primarily by foreign-exchange reserves and gold holdings rather than monetized sovereign debt. Nearly three-fourths of RBI’s assets are linked to forex and gold reserves. This makes India’s experience quite different from the post-2008 Western model of central banking.

But also note the extraordinary rise in RBI’s surplus transfers to the Union government. In 2023-24, it transferred ₹2.11 trillion, which was 7.6% of the Centre’s overall revenue receipts. The transfer for 2025-26 may be even larger than last year’s record ₹2.69 trillion. These are no longer routine bookkeeping remittances, but macro-economically significant fiscal flows.

Technically, these are not ‘dividends.’ Under Section 47 of the RBI Act, the central bank transfers its surplus income to the government after maintaining provisions and reserves. This income is earned through interest on government securities, returns on forex reserves, liquidity operations and forex-market intervention.

Several recent developments have boosted RBI’s profitability. India’s forex reserves have surged to about $700 billion. Higher global interest rates generate larger returns on dollar assets. RBI has actively intervened in currency markets, booking gains through dollar sales while stabilizing the rupee. Gold prices have surged, with the value of RBI’s holdings reportedly rising 57% in 2024-25 alone.

RBI has thus become highly profitable and increasingly important to the government’s fiscal arithmetic.

This raises an uncomfortable question: has RBI started functioning as a quasi-fiscal stabilizer? A research paper by the IMF warned of precisely this danger. It pointed to the difference between the “pure monetary” functions of a central bank—inflation management, lender-of-last-resort operations, reserve management, banking supervision and currency issuance—and “quasi-fiscal” functions that effectively support government finances.

If governments lean on central banks through seigniorage, exchange-rate operations and deficit financing, then the line between fiscal and monetary policy blurs. Fiscal stabilization migrates to the central bank’s balance sheet. India is not monetizing deficits recklessly, but a lot of incremental bond issuances have landed on RBI’s balance sheet.

The Indian fiscal system already has built-in mechanisms that channel savings to government borrowing. The statutory liquidity ratio effectively requires banks to hold a significant portion of deposits in government securities. In practice, Indian depositors already provide substantial captive financing to the sovereign. Public sector banks continue to dominate financial intermediation. Now, the central bank balance sheet is also becoming part of the fiscal-support architecture.

This slippage matters because monetary institutions derive credibility from restraint. Monetary policy needs insulation from political compulsions. Central bank independence is important even though it is also responsible for financial stability and crisis management. Elected governments naturally prefer higher spending and lower borrowing costs. But central banks are expected to preserve monetary credibility even when it is politically inconvenient.

Once governments start depending on central bank transfers, subtle pressures arise: to maintain lower risk contingency buffers; to maximize profits via forex gains; to support government borrowing; and to optimize central bank profitability. This weakens monetary credibility.

The Bimal Jalan Committee created an economic capital framework to impose rules-based discipline on surplus transfers and reserve adequacy. The framework distinguishes realized profits from unrealized revaluation gains on gold and forex assets.

That discipline is essential and must be preserved.

RBI has multiple responsibilities, as a monetary authority, exchange-rate manager, debt manager to the government, custodian of reserves and guardian of financial stability.

But RBI prudence must not evolve into the Centre’s dependence on it as a fiscal tap. The strength of a central bank lies not in its balance sheet or magnitude of profits, but in the credibility of its restraint. RBI must remain India’s monetary anchor and not quietly become the government’s most reliable fiscal stabilizer.

The author is senior fellow with Pune International Centre