The Reserve Bank of India’s (RBI) surplus transfer of ₹2,10,874 crore for 2023-24 comes as a surprise and will prove handy to the next government when it draws up its Budget for this fiscal year. The quantum of the transfer is huge; it is 141 per cent higher that the ₹87,416 crore transferred for 2022-23, and is the highest ever transfer by the central bank to the government. The surplus has been determined after making the transfer to the contingency risk buffer at the upper end of the recommendation as per the Economic Capital Framework adopted by the RBI on the recommendation of the Bimal Jalan committee in 2019.

The central bank has adopted a prudent approach in increasing the allocation to the contingency risk buffer to 6.5 per cent of the RBI’s balance sheet for FY24, in line with the improvement in economic activity. The allocation had been at the lower end of 5.5 per cent between FY19 and FY22, due to slowing economic growth and the pandemic.

While the exact drivers behind the large surplus for last fiscal year will be revealed only in the RBI’s annual report for FY24, several factors may have helped. More than two-thirds of RBI’s assets are held in foreign currency ; these assets expanded around 17 per cent in FY24, according to provisional numbers. With interest rates in the US and other advanced economies at a multi-decade high, the interest earnings from these assets would have been quite healthy. Elevated interest rates in India would have helped RBI garner higher income from its holding of Indian government bonds. A significant portion of its income could have been derived from gains made from interventions in the foreign exchange market. On the expenditure side, the outgo on interest on domestic LAF operations appears to have been lower. Overall, the central bank appears to have done a good balancing act in keeping the rupee and government bond yields stable and managing large foreign portfolio inflows while improving the surplus available for transfer to the government.

The surplus announced by the RBI for FY24 is far higher than the amount of ₹1,02,000 crore pencilled as dividend and surplus from the RBI, other nationalised banks and financial institutions in the interim Budget for 2024-25. With the additional transfer from the RBI amounting to 0.2 to 0.3 per cent of GDP, the fiscal deficit could move lower by that extent, thereby bringing down market borrowing. The other option before the Centre is to utilise the funds to spend on infrastructure. Lower market borrowing has many positive fallouts. It will speed up the Centre’s fiscal consolidation, helping it achieve the 4.5 per cent fiscal deficit target by 2025-26. Lesser supply of paper will reduce the pressure on RBI to support government borrowing through market intervention, helping it trim its balance sheet from the current ₹70-lakh crore. Finally, lower supply of government bonds will push G-sec yields, and market rates, lower. These are important cues for monetary policy.

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