How Does the Reserve Bank Make a Profit?
In this edition of The Ledger , we explain: How does the RBI earn a profit? And how does it decide how much dividend to give the government?
The Reserve Bank of India (RBI) has transferred a dividend of ₹2.7 lakh crore to the Government of India. The budget estimate was ₹2.56 lakh crore — so this is more than expected. That’s good news for the markets and for you. A higher-than-expected dividend helps reduce the government’s fiscal deficit. That, in turn, makes it easier for interest rates to come down — and your loan EMIs may get lighter.
RBI’s Job Is Not to Make a Profit — But It Still Does
The RBI isn’t a profit-making institution. It’s the central bank, owned by the Government of India. Yet, by the nature of its operations, it does end up making money. Even though it’s legally autonomous, it still transfers a portion of its profits to the government every year as a dividend.
The RBI has three major roles — and each of them generates some revenue.
Maintaining Economic Stability
The RBI’s core job is to keep the economy stable — which means ensuring growth continues while keeping inflation under control. It uses interest rates to balance the two. It also manages foreign exchange reserves, especially US dollars.
Here’s where the money comes in:
The RBI buys dollars when they are cheap and sells them when they become expensive. When the rupee falls sharply, the RBI sells these dollars in the open market to stabilize the currency. Since it had bought them at a lower price, this results in a profit. This forex trading is a major source of income for the RBI.
2.Banker to the Government
The RBI acts as the government’s banker. It helps the government raise money by selling bonds in the market. The government borrows this money to cover its budget deficit.
Now that the government has received a bigger-than-expected dividend, it may need to borrow less. Lower government borrowing makes room for the private sector to access cheaper credit. This increases the chances of an interest rate cut by the RBI in the coming months — another potential relief for your EMI.
3.Printing Currency
The RBI prints currency notes — but the cost of printing is far lower than the face value of the notes. The difference between the face value and the printing cost is also counted as income.
Other Sources of Income
The RBI also earns from its investments, such as U.S. treasury bonds, gold reserves, and bonds from other countries. Fluctuations in gold prices can also lead to profits.
How Much Dividend Does the Government Get?
The RBI doesn’t hand over all its profits. A fixed portion is retained as a buffer for emergencies — called the Contingency Risk Buffer (CRB). In 2018, there was a dispute about how much should be retained. A committee led by former RBI Governor Bimal Jalan created a framework for this.
Earlier, the RBI kept 5.5% to 6.5% of its profit as CRB. That has now changed — the new band is 4.5% to 7.5%. Because of this wider range, the dividend to the government has slightly decreased. Still, ₹2.7 lakh crore is a huge transfer.
This extra income is especially welcome at a time when defense spending may increase due to India-Pakistan tensions. Earlier, there were fears that the fiscal deficit could widen — but this higher dividend helps ease those concerns.
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