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HOW DOES THE RBI EARN MONEY?

Written by Talent KAS

Related Topics: RBI Surplus Transfer, Bimal Jalan Committee

Context

  • RBI Central Board has decided to transfer ₹1.76 lakh crore to the Centre.
  • The ₹1.76 lakh crore includes the central bank’s 2018-19 surplus of ₹1.23 lakh crore and ₹52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the Board meeting.
  • RBI had formed a committee chaired by former RBI Governor Bimal Jalan to review its ECF last year.

Earnings of RBI

  • Open market operations, wherein a central bank purchases or sells bonds in the open market in order to regulate money supply in the economy, are a major source of income for the RBI.
  • Apart from the interest received from these bonds, the RBI may also profit from favourable changes in bond prices.
  • Dealings in the foreign exchange market that the RBI engages in may also contribute to the bank’s profits.
  • The RBI, for instance, may buy dollars cheaply and sell them dear in the future to pocket profits.
  • Unlike commercial banks, the primary mandate of the RBI is not to earn profits but to preserve the value of the rupee.
  • Profit and loss are thus merely a side effect of its regular operations to shape monetary policy.

Expenditure of RBI

  • RBI’s expenditure is mainly on printing of currency notes, on staff, besides commission to banks for undertaking transactions on behalf of the government and to primary dealers that include banks for underwriting some of these borrowings.
  • The central bank’s total cost, which includes expenditure on printing and commissions forms, is only about 1/7th of its total net interest income.

RBI Transfers over the years

  • Each year, the RBI transfers to the government any money in its balance sheet that it deems to be beyond its operational and contingency needs.
  • Amount of funds transferred by the central bank to the government this year is much higher than earlier — 146.8% more than what it had paid out last year.
  • Previously, the highest amount of surplus funds that the RBI had transferred to the government was ₹65,896 crore in 2014-15.
  • The net surplus figures are: ₹52,683 (2013-14); ₹65,896 (2014-15); ₹65,880 (2015-16); ₹30,659 (2016-17) and ₹50,000 (2017-18)

Controversy around the Transfer

  • The massive payout has raised concerns that the government may be confiscating money from the RBI to meet its urgent spending needs, thus effectively turning the central bank into a banker for the government.
  • Central banks such as the RBI, however, are supposed to be independent from all forms of government influence.
  • In reality, governments across the world try to influence decision-making by their respective central banks in various ways.
  • Some economists argue that the government has the right to make use of funds in the custody of public institutions such as the RBI to meet its fiscal needs.
  • Critics, however, argue that stripping the financial assets of regulatory institutions such as the RBI can compromise their independence.

To know more about RBI Surplus Transfer:

https://kas.talentacademy.co.in/2019/08/28/rbi-surplus-transfer-all-you-need-to-know/

Practice Question

Stripping the financial assets of regulatory institutions such as the RBI and SEBI can compromise their independence. Do you agree?

[Sources: The Hindu, Indian Express]

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