RBI's Record Surplus Transfer
The Reserve Bank of India (RBI) recently approved a record surplus transfer of ₹2.69 trillion to the Union government, exceeding the budgeted receipts of ₹2.56 trillion from the RBI and public-sector financial institutions. This surplus will assist the government in achieving a fiscal-deficit target of 4.4% of the GDP for the financial year.
Implications of the Surplus Transfer
- The additional revenue may be used to increase the defense budget.
- A higher surplus transfer aids liquidity conditions and supports the RBI's monetary policy easing efforts.
Despite being higher than expected by the government, the surplus fell short of market expectations.
Contingent Risk Buffer Adjustment
- The RBI board decided to adjust the contingent risk buffer range to 4.5-7.5% of the balance sheet, opting to keep it at the upper end.
- This adjustment aligns with the economic capital framework adopted in 2019, enhancing the central bank’s flexibility.
- Without this increase, the surplus transfer could have reached around ₹3.5 trillion.
RBI's Income Sources
- The RBI's higher surpluses are attributed to increased interest income and foreign-exchange gains.
- Higher US interest rates contribute to the RBI’s interest income.
- The RBI sold foreign exchange worth nearly $400 billion last financial year, resulting in gains due to favorable historical dollar acquisition prices.
Foreign Exchange Market Intervention
Excessive intervention in the foreign-exchange market is discouraged as it may reduce the private sector's incentive to hedge and increase reliance on foreign funding. The RBI should intervene mainly during excessive volatility, allowing the private sector to manage regular currency fluctuations.
