The quantum of dividend payments of the RBI to the Central government during the last few years has followed a rising trend not witnessed before. In 2024-25, the payout at ₹2,10,874 crore took a leap of 141 per cent vis-à-vis the previous year. The amount for the current fiscal, 2025-26, is ₹2,68,590 crore (equivalent to a little over $31 billion, at the current exchange rate) entailing a yearly growth of 27.3 per cent.
Seigniorage income
In general, the surplus generated by any central bank follows a logic which is unique and different from that of commercial enterprises, including banks. The surplus is derived from what is known as ‘seigniorage’, the historical roots of the meaning of which alludes to the earnings of the issuers of currency notes/coins.
The central bank also enjoys two related privileges not granted to any other entity: One, it can expand and contract its balance sheet at will. Two, its monetary liability has little or no financial cost.
Roughly speaking, the seigniorage is equal to the interest earned on the central bank’s assets that are counterpart of its (i) monetary liability (Reserve Money or M1 in the case of RBI), (ii) deposits of Central and State governments, and (iii) equity.
Disregarding the variation in the rate of interest earned on foreign and domestic assets as also in the operating cost from year to year, the growth of net income (before transfers to free reserves to bolster equity) of a central bank should approximately correspond to that of the aggregate of the three items, as above.
In the case of RBI, during the three-year period from 2021-22 to 2024-25, while the assets, as above, grew at an annual compound rate of a little less than 7 per cent, the net income rose at a much higher compound rate of a little over 29 per cent.
The compound annual growth rate of dividend payment to the Central government during this period was much higher at about 107 per cent, thanks to the wide year-on-year variation in the transfer from net income to RBI’s contingency fund, the balance of which represents almost the entire net worth of RBI.
Although the year-to-year divergence between the net income and dividend paid to the Central government has been sought to be explained in terms of RBI’s economic capital framework, a closer look at the matter clearly brings out the signature of fiscal considerations in this regard.
Chart 1 highlights the increasing significance of the dividend payout to the Central government in relation to its net tax revenue.
Exchange gain’s key role
As was the case in the earlier few years, very high exchange gain, both in absolute terms and also in relation to RBI’s interest income was a major contributor for the net income and the dividend paid to the Central government, is given in Chart 2.
While the interest income on the assets of RBI constitutes its seigniorage income, it is open to question if very large exchange gains fall under this category. It is not difficult to surmise that the bulk of the exchange gain happened at the ‘sale’ leg of the US$/Rupee buy-sell swaps undertaken by RBI.
Also, at least some of the swaps are for reinstating liquidity in the wake of spot sales of US dollars to support the rupee at times of heightened downward pressure on it. But the rest of the buy-sell swaps are discretionary in nature with no declared policy objective for this purpose.
The volumes of purchase and sale of US dollars on account of outright as well as swap transactions increased significantly in 2024-25 (Chart 3), which explains the spurt in exchange gain by about 33 per cent. The outstanding sale commitment also increased correspondingly, with the net forward position reaching a negative of $84.3 billion as on March 31, 2025.
The overwhelming presence of RBI in the buy-sell segment of the swap market has had the effect of distorting the forward curve and reducing the incentive for two-way trading in the swap market.
Abundant riches
In the early years of the 1991 structural reform in India, the government had made enquiries about the adequacy of RBI’s net income, particularly when high-level discussions for putting an end to the automatic monetisation of fiscal deficits entered a decisive stage in 1994.
However, for a variety of reasons, including a view shared in the political and bureaucratic circles in Delhi, that it wouldn’t be appropriate to put any kind of pressure on RBI for more income and transferable surplus, the matter was not pursued any further.
The possibility of converting at least some of the unrealised exchange gain, accruing to RBI on account of the secular depreciation of the rupee vis-à-vis US dollar, to realised income remained a dormant issue for quite some time.
The steadfast position of the leadership of RBI in those days in the matter also perhaps had an impact.
The issue was revived in the late 2000s. Various alternatives for this purpose were examined and eventually a change in the accounting rule was adopted and implemented, according to which profit/loss on sale of the US dollar and other currencies would be booked vis-à-vis their average acquisition cost. The impact of this change in rule was felt in a big way in 2019-20, which witnessed a huge jump in exchange gains. There has not been any looking back since then.
To be sure, there is nothing wrong, in principle, to book profit on the sale of the US dollar and other currencies vis-à-vis their acquisition cost. For any commercial entity, this rule cannot be taken advantage of to make unrealistic exchange gain because the volume of purchase to be followed by sales cannot be increased beyond a point because of ‘budgetary’ constraints.
But for RBI this constraint does not exist, as it can increase the volume of purchase and subsequent sale of US dollars in a purely discretionary manner, as has seemingly been the case.
Moreover, RBI has the incentive to do so because the rupee generally depreciates against the US dollar over time, principally because of higher inflation in India. Unless, of course, RBI puts in place adequate and credible checks and balances that would prevent this.
Converting a large portion of unrealised exchange gain arising out of the depreciation of the rupee (which is notional) into realised gain to be given to the government for budgetary spending is a tricky thing at best. There are significant downside risks to this, including, but not limited to, trimmed monetary independence for the RBI. No wonder, major central banks are not known to do this.
One only hopes that RBI does not become a ‘perpetual motion machine of the first kind’, which is a hypothetical machine that can do work indefinitely without an external energy source.
The writer is a former central banker and a consultant to the IMF. (Through The Billion Press)