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Summary
The Reserve Bank of India's record payout to the central government adds to the economy’s cushion. Minimal fiscal slippage would suit its own policy ends too. But weak capital flows could yet cloud the risk horizon.
The Reserve Bank of India’s (RBI) transfer of its 2025-26 surplus to the government was under watch for any sign of fiscal over-support at the cost of its own risk cushion. Declared at nearly ₹2.9 trillion, up 6.7% from last year’s transfer for 2024-25, it appears to have balanced imperatives well in today’s macro-economic context.
RBI’s carve-out for its contingent risk buffer was 6.5% of the size of its balance sheet, slashed from last year’s 7.5%, the upper limit of a range deemed prudent.
On a growing asset base—its balance sheet grew by around 21% to almost ₹92 trillion on 31 March—that slash enlarged the central bank’s payout, but the uptrend witnessed across recent years in such transfers is a story of robust earnings.
So strong has RBI’s gross income been that some RBI watchers had expected it to fill the Centre’s coffers by at least ₹3 trillion—to help relieve fiscal stress caused by the West Asia war’s oil shock. In absolute terms, it transferred almost ₹1.1 trillion to its contingency reserve, 144% more than last year.
It judged its risk exposure well covered and also managed to aid government finances.
The enabler-in-chief of that transfer was a rise of about 26% in RBI’s gross income for fiscal 2025-26. Driving this was an increase in the value of its foreign-exchange holdings, thanks to the dollar’s rise, as well as that of its gold stack.
RBI also earns income as a side-effect of its intervention in the currency market and liquidity operations, apart from what it gets by way of seigniorage and interest on government securities.
Non-profit aims can spell large gains. Heavy dollar sales to smoothen the rupee’s decline, for example, earn RBI money if that forex was acquired at a lower cost earlier, as is usually the case.
What part of its overall income to hold back as a prudential measure is a decision that RBI makes within its Economic Capital Framework, which sets out a contingency buffer range of 4.5% to 7.5% of its balance sheet.
Times of uncertainty do not demand a maximum setting if RBI is confident of broad macro stability with, say, just 6.5% as back-up. Moreover, RBI has a direct interest in minimal fiscal slippage as war disruptions take their toll on New Delhi’s budget.
Monetary policy is easier to formulate if a widened deficit does not add to inflationary pressure. In general, fiscal control aids price stability. With a haze left around India’s inflation and growth paths by the dust-up of war in West Asia, it’s useful for the Centre and central bank to make policy-adjustment space for each other.
RBI’s confidence in stability is backed by its record and often articulated by its leadership. In the context of a falling rupee, for instance, RBI Governor Sanjay Malhotra told Mint: “With the recent depreciation, it would be reasonable to think that the rupee is not overvalued. If anything, one could argue that the rupee has become undervalued, both in nominal as well as in [real effective exchange rate] terms.”
What must also be borne in mind is how capital flows may remain squeezed by a low US- India rate differential, which could mean a prolonged spell of currency stress. From a larger perspective, the optics of the Centre’s budget reliance on large RBI transfers must not lead markets to read it as what central bankers call a ‘credibility risk.’
Globally, investor sensitivity to it may have been raised by the US Federal Reserve’s recent travails on that front. As an inflation-targeting central bank, RBI’s approach will always need a delicate balance.
English (US) ·