In a strategic fiscal move, the Ministry of Finance is closely examining the Reserve Bank of India’s (RBI) capital buffer rules, with an eye toward unlocking higher dividends as the government prepares to ramp up defence expenditure. This review runs parallel to the RBI’s own internal review of its Economic Capital Framework (ECF)—a policy that determines how much of the RBI’s profits are retained and how much are transferred to the government.

The issue gained prominence after the RBI, in 2023-24, transferred a record ₹2.1 lakh crore as a surplus dividend to the Central government—far above the previous year’s ₹87,416 crore. For 2024-25, estimates suggest a potential dividend in the range of ₹2.5–₹3 lakh crore, depending on changes to the existing framework.

Parallel Reviews: Government and RBI Eye Same Goal

According to reports by The Hindu, while the RBI's officers have been reviewing the ECF since January 2025, the Finance Ministry has initiated a separate, parallel evaluation to assess whether there is scope to reduce the conservative buffers recommended earlier. A senior government official confirmed:

“The RBI’s review process is parallel and our review process is running parallel.”

The goal, it appears, is to explore whether the existing capital retention norms, particularly the Contingency Risk Buffer (CRB), can be adjusted downward to allow for greater annual surplus transfers to the Centre.

Revisiting the Jalan Committee Norms

The current capital framework stems from the recommendations of the 2018 Jalan Committee, which advised that the RBI should maintain a CRB of 5.5% to 6.5% of its balance sheet. Any excess capital beyond that range could be distributed to the government as a dividend.

This buffer is essentially a precautionary reserve against unforeseen financial instability or systemic crises. However, the Finance Ministry believes the framework may be overly conservative in its current form. The same official noted:

“There is a perception that the Jalan Committee recommendations were too conservative... Let us see what the RBI decides, but the government will also form its view.”

If the buffer is lowered—say to below 5.5%—this could significantly boost the surplus available for transfer to the government.

Why the Push Now? Rising Defence Costs

This review coincides with rising geopolitical tensions, particularly along the Pakistan border, which has reportedly triggered a planned increase in India’s defence budget. Though the official denied that finances are under strain:

“The government is not worried about its finances, even if defence expenditure is hiked.”

Nevertheless, any additional surplus from the RBI could provide greater fiscal flexibility, allowing the government to accommodate defence hikes and other critical expenditures without breaching its fiscal consolidation path.

The defence allocation for FY25 has not yet been officially revised, but sources suggest a significant bump is under consideration, with long-term procurement plans and infrastructure upgrades likely to be prioritized.

RBI Board Meets, Reviews Capital Framework

In a notable move, the RBI on Thursday held its 615th Central Board meeting, during which the ECF was formally reviewed. While no immediate changes were announced, this meeting marks the first official acknowledgement that the framework is being re-evaluated.

A revised ECF—if approved by the RBI board—could pave the way for a larger dividend payout later this fiscal year. However, the RBI is expected to tread cautiously, balancing fiscal support to the Centre with its mandate of maintaining financial system stability.

Past Trends and Future Projections

Over the last five years, the dividend transferred by the RBI to the government has varied significantly:

• FY20: ₹57,128 crore

• FY21: ₹99,122 crore

• FY22: ₹30,307 crore

• FY23: ₹87,416 crore

• FY24: ₹2,10,000 crore (record)

With the central bank's balance sheet expanding and revenues from foreign exchange operations rising, the scope for larger payouts has widened, especially if the capital buffer is relaxed.

Policy Implications and Economic Impact

If successful, a revised dividend policy could have broader implications:

• Improved fiscal metrics without raising taxes

• Lower market borrowings, helping contain bond yields

• Potential boost to social sector or infrastructure spending

However, critics argue that over-dependence on central bank dividends could erode the RBI’s financial autonomy, especially if buffers are reduced too sharply.

Conclusion

The evolving dynamics between the RBI and the Finance Ministry over surplus transfers underscores a delicate balance between fiscal support and monetary prudence. As both institutions independently review the Economic Capital Framework, all eyes will be on the final dividend figure for FY25 and whether policy tweaks will open the gates to a new era of enhanced transfers to the Centre.

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