The ultimate impact of surplus transfer is expansion of primary money. Which will become the base for further monetary growth

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During fiscal 2025-26 RBI transferred to Central government a surplus of ₹2,86,588.46 crore (0.83 per cent of GDP) on the top of a surplus transfer of ₹2,68,590.07 crore (0.90 per cent of GDP) in 2024-25 and ₹2,10,873.99 crore (0.99 per cent of GDP) in 2023-24. Thus, during the past three years there has been substantial surplus transfer to the Central government. It is pertinent to note that the issues relating to surplus transfer by the RBI even though have been discussed in various fora, the monetary implications have not however been addressed and this article attempts to highlight them.The surplus transfer from RBI to Central government is mandated in terms of Section 47 of the RBI Act 1934. As per the mandate, the net income (total income minus total expenditure) after adjusting to transfer of funds is required to be transferred to Central government. The total income comprises interest income (from domestic sources and foreign sources) and other income are also from domestic sources and foreign sources. Total expenditure consists of mainly employee costs, printing charges, agency charges and risk provisions.The gross income (₹4,27,684.15 crore) of RBI increased by 26.42 per cent over the previous year while the expenditure (₹1,41,091.69 crore) before risk provisions increased by 27.60 per cent. The net income, before risk provision and transfer to statutory funds, amounted to ₹3,95,972.10 crore in 2025-26 as against ₹3,13,455.77 crore in 2024-25. Thus, RBI’s ‘Balance Sheet of the Bank’ showed an increase of 20.61 per cent and stood at ₹91,97,121.08 crore as on March 31, 2026.Total income was received from both foreign and domestic sources. However, income from foreign sources was higher accounting for 76.53 per cent mainly on account higher share (51.60 per cent of the total income foreign sources) received from gains/loss from sale/ redemption of foreign securities.The revised Economic Capital Framework (ECF) provides flexibility to maintain the Contingent Risk Buffer (CRB) between the range of 4.5 per cent and 7.5 per cent of the size of the Balance Sheet. Taking into account the current macroeconomic factors, financial performance of RBI and maintenance of appropriate risk buffers, RBI transferred ₹1,09,379.64 crore towards the CRB in 2025-26 as against ₹44,861.70 crore in the previous year. At this level, the CRB constituted 6.5 per cent of the RBI Balance Sheet. Which is reasonable.In the above context it is important to understand the monetary implication of RBI’s transfers as it has a bearing on monetary policy. The monetary and liquidity management is inherently related to movement in reserve money (RM) as reserve money is the base money through which money creation takes place. In a sense, RM represents the stylised fact of RBI’s balance sheet with its components (liabilities of the central bank) primarily comprising currency and bank reserves (deposits of the banks with RBI as a mandatory requirement) and sources (asset of the RBI comprising credit to government which is also called net domestic asset or NDA and net foreign currency assets or NFA).When net domestic assets increase due to increase in net RBI credit to Government, primary money is instilled into the system. Similarly, when RBI purchases foreign currency in exchange of Indian rupee the net foreign exchange assets of the RBI increases resulting in infusing primary money into the system.Having discussed the components and sources of RM in terms of RBI balance sheet, we move to figure out monetary implications of surplus transfers from RBI. As long as the RBI surplus has not been transferred to the Central government it is recoded as reserves in the non-monetary liability of the RBI. Once the surplus is transferred to government there is a movement from non-monetary liability (NML) in terms of reserves to government deposits. Thus, the (NML) in terms of reserves gets reduced and deposits get increased by the equivalent amount. Thus, in accounting parlance, in the RBI balance sheet on the liability and asset sides there is no net increase.Non-tax revenueWhen RBI’s surplus is transferred to the Central government it is recorded as the non-tax revenue under the head dividend and profits. It may be noted that the surplus transfer to government aggregating ₹2,86,588.46 crore in 2025-26 will be accounted as non-tax revenue of the government in 2026-27. At this level, the surplus transfer would constitute 43.01 per cent of the total non-tax revenue. Illustratively, the total dividend and profits in the budget estimates for 2025-26 amounted to ₹3,25, 000 crore but it was placed higher at ₹3,75,590 crore in the revised estimates for 2025-26 and further increased to ₹3,80,136 crore. Thus, the increase was ₹55,136 crore mainly on account of surplus transfer from RBI. This shows high dependency of the government on RBI’s surplus transfer.Once the surplus is transferred to government and government spends it under various heads of expenditure the cash flows in the system increases resulting in higher rupee liquidity in the banking system To the extent these are flowing into the banking system there is increase in excess reserves (deposits of the banks with RBI) resulting in increase in RM and subsequently in monetary expansion. Thus, it is tantamount to injection of durable liquidity. In the end, the ultimate impact of surplus transfer is expansion of primary money. Which will become the base for further monetary growth. It is important to understand the difference between transfer of profits from PSUs and transfer of surplus from RBI.From the foregoing the emerging conclusions are: (a) there are monetary implications in terms of increase in reserve money which can become the base for further monetary expansion; and (b) there are fiscal implications resulting in increase in non-tax revenue allowing a space to government to spend.To conclude, the liquidity infusion from surplus transfer has potential to swell durable liquidity. Technically speaking, this is not monetisation of fiscal deficit. But implicitly it tantamounts to that. Given the size of the transfers, their monetary and liquidity implications cannot be ignored. We may flag that RBI Governor in his statement dated June 6, 2026, has pointed out inter alia the liquidity implication of the surplus transfer. He said, “Going ahead, the usual drawdown of government cash balances after the RBI’s surplus transfer and the return of currency during the monsoon season will aid banking system liquidity in the near term.”Rangarajan is former Governor RBI and former Chairman Prime Minister’s Economic Advisory Council. Pattnaik is a former central banker and currently teaching in Gokhale Institute of Politics and Economics. Views are personalPublished on June 9, 2026