Understanding the RBI Surplus Fund: Can the Government Access This Treasury for Economic Stimulation?

Overview of the Reserve Bank of India (RBI) Surplus Fund

The Reserve Bank of India (RBI) earns its revenue primarily through interest income on government securities, from currency trading (buying and selling dollars), and from lending money to banks. Apart from the expenses related to printing money and staff salaries, the rest of the earnings go into the surplus funds of the RBI. Notably, the RBI is exempt from paying income tax, which allows for larger surpluses. A significant portion of this profit is paid as dividends to the central government, while the surplus is retained in various funds within the RBI. This article explores the different surplus funds of the RBI, their current values, and the debate on whether the government can access these reserves for economic stimulation.

Infographic: Different Funds of the RBI

Detailed Breakdown of RBI Surplus Funds

Contingency Fund of the RBI

This fund is specifically designated for contingencies such as natural calamities, prolonged wars, or financial emergencies. The current balance is around ?2.5 lakh crore, accounting for approximately 6.8% of the total assets of the RBI. This fund is essential as it provides a cushion for unexpected financial situations.

Currency and Gold Revaluation Fund

This fund invests in assets such as gold and dollars, realizing significant gains due to appreciation in the value of these assets over time. The present balance in this fund is approximately ?7 lakh crore, representing around 23% of the total assets of the RBI. The increased value of gold and the depreciation of the rupee against the US dollar contribute significantly to the gains in this account.

Asset Management Fund

Also known as the Asset Management Fund, this is relatively small with a balance of ?13,000 crore and is not considered highly significant in terms of overall RBI assets.

Is the RBI Surplus Fund Accessible to the Government?

Dr. Sayeesh Pillai argues that the RBI surplus fund should be more accessible to the government for economic and development purposes. He believes that a substantial part of the surplus should be transferred to the government for use in various schemes. However, the RBI, following the recommendations of the Bimal Jalan Committee, has agreed to transfer a certain amount to the central government account. The government's desire to utilize these funds for economic stimulus efforts, such as cutting taxes and providing more funding for different sectors, highlights the potential for these reserves to be leveraged more extensively.

RBI's Monetary Functions and Source of Earnings

The RBI plays a crucial role in the management of the Indian economy through various monetary functions. It is involved in the circulation of money, determining the exchange rate, valuing the rupee relative to other currencies, managing government securities, handling the purchase and sale of foreign currencies, monitoring and controlling banks, maintaining currency chests, printing currency notes, and regulating interest rates.

Additionally, the RBI earns money by conducting operations that require the quoting of two rates: the buy and sell rates. This system allows the RBI to make a profit on these operations.

Asset Revaluation and Revaluation Reserve

The RBI periodically revalues its assets, including the Currency and Gold Revaluation Account (CGRA). In the fiscal year 2017-18, CGRA stood at ?6.9 lakh crore, primarily contributed to by notional gains due to market movements in currency rates and gold prices. A significant factor was the depreciation of the rupee against the US dollar and the rise in the price of gold.

Infographic: RBI's Asset Revaluation and Revaluation Reserve

Impact on the Economy

The government's intention to utilize this fund for economic stimulation reflects the potential impact of these reserves on the overall economy. By cutting taxes and providing more funds for specific sectors, the government aims to boost economic growth and development.

Conclusion

The RBI surplus fund is a vital component of the Indian financial system, providing a buffer for unforeseen circumstances. While the government desires more access to these funds for economic development, the RBI's current approach is to retain these reserves for their intended purpose. Balancing the needs of the economy with the financial stability provided by the RBI surplus fund remains a complex issue.