Where does the RBI’s surplus come from? | Explained Premium

RBI transfers record ₹2.69 lakh crore surplus to government, sparking debate on buffer funds and independence.

The story so far: Putting an end to much speculation, the Reserve Bank of India’s Central Board on Friday (May 23, 2025) announced that it had decided to transfer ₹2.69 lakh crore to the Central government as a surplus for the year 2024-25. This is a record high transfer, 27% higher than the ₹2.11 lakh crore transferred the previous year, which itself was a record at the time.

This ₹2.69 lakh crore is also higher than what the government itself budgeted — ₹2.56 lakh crore — as dividend or surplus from the RBI, and the public sector banks and insurance companies. With the RBI’s share itself exceeding this amount, this means the government’s total collections from this category is likely to be far in excess of what it budgeted.

However, things have not always been so easy for the government when it comes to the RBI’s surplus. There have been strong arguments on both sides in the past on what should be done with the surplus the RBI earns, including some reportedly caustic remarks by Prime Minister Narendra Modi himself.

Before getting into the past controversy, it’s important to first understand how the RBI earns money, and also why what it transfers to the government isn’t called a ‘dividend’. The RBI is not a company in the traditional sense with shareholders, and so it cannot issue dividends.

But it is a ‘full-service’ central bank, meaning that not only does it target inflation, issue currency, and regulate the banking sector, it is also the last resort lender to the government of India and the various State governments.

The RBI can earn significant profits from some of these functions. For example, the process of issuing currency allows for the RBI to earn something called seigniorage. Seigniorage is basically the difference between the face value of a currency and the cost it took to produce that currency. When the RBI issues currency, say, a ₹500 note, the commercial banks have to ‘buy’ these notes from the central bank at the full face value (in this case, ₹500) even though it might have cost a fraction of that to actually produce that note.

This counts towards the RBI’s revenue. Then, the central bank also lends money to the Central government, State governments, and commercial banks with interest. This interest, too, adds to the RBI’s revenue. Third, the RBI makes investments in other countries’ bonds as well, not only earning interest on these, but also potentially benefiting from currency exchange rate fluctuations.