Economic Capital Framework and RBI’s Dividend Transfer

• 22 May 2025

For Prelims: Reserve Bank of India (RBI), Economic Capital Framework (ECF), Contingency Risk Buffer (CRB), Bimal Jalan committee, Liquidity Adjustment Facility (LAF), Open Market Operations (OMOs),  monetary policy, Gross Domestic Product (GDP) 

For Mains: About Economic Capital Framework (ECF), Its related Provisions and Significance, Provisions Governing & Significance of  RBI’s Surplus Transfer to Government. 

Source: IE 

Why in News? 

The Central Board of Directors of the Reserve Bank of India (RBI) assessed the Economic Capital Framework (ECF) for determining risk provisioning and the distribution of  dividend (surplus) from the central bank to the government. 

What is Economic Capital Framework (ECF)? 

• About: The ECF is a structured mechanism adopted by the RBI to determine the appropriate level of risk provisions and the surplus (profit) that can be transferred to the Government of India under Section 47 of the RBI Act, 1934.  
  • The framework was recommended by the former RBI Governor, Bimal Jalan Committee (2018) and formally adopted in 2019. 
• Objective: It aims to strike a balance between maintaining adequate financial buffers for monetary and financial stability and ensuring prudent surplus distribution. 
  • It enables the RBI to maintain a Contingency Risk Buffer (CRB) as a financial safeguard against unforeseen shocks like currency volatility and economic crises.  
    • CRB is a financial safety net of 5.5% to 6.5% of RBI’s balance sheet, ensuring its stability and capacity to act as Lender of Last Resort during crises. 
• Revised ECF (Bimal Jalan Committee Recommendations, 2019): 
  • Realized Equity (Contingency Fund-CF): The CF acts as a buffer against unforeseen losses and is to be maintained between 5.5% and 6.5% of the RBI’s balance sheet.  
    • Any excess above this range is transferred to the government. The RBI’s Central Board has fixed the target at the lower bound of 5.5%. 
  • Economic Capital (Capital and General Risk Account- CGRA): The CGRA includes the RBI’s capital, reserves, risk provisions, and revaluation balances arising from fluctuations in exchange rates, gold prices, and interest rates.  
  • It is to be maintained between 20.8% and 25.4% of the balance sheet size, and any excess may be transferred to the Centre. 
• Review Mechanism: As per the committee's recommendations, ECF is reviewed every 5 years to adjust for evolving economic conditions and risks, with the latest review done in August 2024. 
• Trends in Dividend Transfer: RBI’s dividend transfers to the government have increased from Rs 30,307 crore in FY22 to an estimated Rs 2.5-3 lakh crore in FY25. 
  • This sharp rise is attributed to strong earnings from dollar sales, rising gold prices, and appreciation in government securities. 
  • This higher dividend will help manage the fiscal deficit and boost banking liquidity and potentially easing short-term interest rates. 

 

What are the Provisions Governing RBI’s Surplus Transfer? 

• RBI Act, 1934: Section 47 of the RBI Act mandates that the net profits of the RBI, after making provisions for the Contingency Fund (CF) and Asset Development Fund (ADF), must be transferred to the Central Government. 
  • Section 48 exempts the RBI from paying income tax or super tax on its income, thereby enabling a more direct transfer of surplus to the exchequer. 
• Committee Recommendations: Historically, the RBI retained a considerable portion of its profits to strengthen its internal reserves. 
  • Over the years, several expert committees have examined the adequacy of RBI’s capital buffers and the quantum of surplus to be transferred: 
    • V. Subrahmanyam Committee (1997) 
    • Usha Thorat Committee (2004) 
    • YH Malegam Committee (2013) recommended higher transfers to the government while maintaining prudent reserves. 
    • Bimal Jalan Committee (2018)  introduced the revised Economic Capital Framework (ECF), balancing risk provisioning with fiscal needs. 
  • Following these recommendations, particularly the Malegam and Jalan Committees, the RBI has progressively increased its surplus transfers to the government, ensuring both macroeconomic stability and fiscal space for public spending. 

What are the Major Income & Expenditure Heads of RBI? 

Source of Income	Interest on Rupee Securities: Income earned from holding rupee-denominated Government Securities, adjusted for profit or loss on their sale or redemption, along with depreciation and amortization expenses.  Interest from Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF): Net interest earned through operations under LAF and MSF mechanisms.  Interest on Loans and Advances: Interest income from loans extended to the Central and State Governments, banks, financial institutions, and RBI employees.  Interest from Foreign Currency Assets: Earnings from interest on foreign currency-denominated assets held by the RBI.  Open Market Operations (OMOs)
Expenditure	Risk Provisions: The RBI maintains 2 principal risk funds:  Contingency Fund (CF): Set aside to cover unforeseen contingencies such as depreciation in the value of securities and risks arising from monetary policy changes.  Asset Development Fund (ADF): Allocated for investments in subsidiaries and associated institutions, as well as for internal capital expenditures.  Currency Printing Costs: Expenses related to the printing of banknotes.  Agency Charges: Commissions paid to banks, primary dealers, and other agents involved in currency distribution and government securities operations.  Operating Expenses: Salaries, benefits, and other related costs incurred for RBI staff.  Interest Paid on Deposits and Borrowings: Expenditure incurred by a bank in the form of interest payments on funds deposited by customers, inter-bank borrowings, central bank facilities, or debt instruments such as bonds.
Surplus	Net income derived from the total income (sources of income) minus total expenditure (expenses).  Reserve funds and contingency provisions for financial stability and emergencies.

What is the Significance of RBI’s Surplus Transfer to Government? 

• Reduces Fiscal Deficit: Assists the government in meeting its fiscal deficit target of 5.1% in FY 2024–25 by augmenting non-tax revenue. 
• Enhances Revenue Generation: Acts as a major non-tax revenue source, enabling higher public expenditure and supporting economic growth. 
• Lowers Government Borrowing: May reduce gross borrowings by up to Rs 1 trillion, freeing fiscal space for capital expenditure. 
• Reduces Borrowing Costs: Lower borrowing needs can soften G-Sec yields, reducing the government’s debt servicing burden. 
• Keeps Interest Rates in Check: Falling sovereign yields influence broader market rates, making borrowing cheaper for businesses and households. 

Conclusion 

The Economic Capital Framework ensures a balanced approach between RBI’s autonomy and the government’s fiscal needs. By setting clear risk buffers and surplus transfer rules, it promotes financial stability and fiscal prudence. This framework supports sustainable economic growth and strengthens macroeconomic resilience.

Drishti Mains Question:

What is the Economic Capital Framework (ECF) and how does it manage the balance between the Reserve Bank of India’s autonomy and the government’s fiscal requirements?

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Prelims

Q. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? (2017)

1. It decides the RBI’s benchmark interest rates. 
2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 
3. It functions under the chairmanship of the Union Finance Minister. 

Select the correct answer using the code given below: 

(a) 1 only 
(b) 1 and 2 only 
(c) 3 only 
(d) 2 and 3 only 

Ans: A 

Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020)

1. Cut and optimize the Statutory Liquidity Ratio 
2. Increase the Marginal Standing Facility Rate 
3. Cut the Bank Rate and Repo Rate 

Select the correct answer using the code given below: 

(a) 1 and 2 only 
(b) 2 only 
(c) 1 and 3 only 
(d) 1, 2 and 3 

Ans: B