In a notable shift in monetary strategy, the Reserve Bank of India (RBI) has decided to expand the range of the Contingent Risk Buffer (CRB) from the earlier 5.5%-6.5% to 4.5%-7.5% of its balance sheet liabilities. This change is based on the recommendations of the Jalan Committee, which had reviewed the central bank’s capital framework.

This adjustment might seem like a minor numerical tweak, but it carries significant implications for India’s fiscal health, inflation management, and RBI’s income management strategy. Here's why this change is both sensible and necessary.

WHY THIS IS A SENSIBLE CHANGE

At its core, RBI’s dividend to the government is a form of fiscal deficit monetisation. Essentially, when the central bank passes on surplus funds to the government, it fills the gap between the government’s income and expenditure, often by printing currency.

Such monetisation can lead to inflation—too much money chasing too few goods. Hence, central banks across the globe, including RBI, are cautious about transferring excessive dividends, especially in periods of high inflation.

By expanding the CRB range to 4.5%-7.5%, the RBI gains flexibility to align its dividend disbursal with economic cycles:

• In years of weak GDP growth, RBI can lower the CRB to 4.5%, allowing a higher dividend payout to help the government increase fiscal spending and stimulate the economy.

• In contrast, in years of robust growth and rising inflation, RBI can raise the CRB up to 7.5%, thereby restricting the dividend and avoiding excess liquidity in the market.

This mechanism essentially serves as a buffer against overheating of the economy and makes the central bank a more adaptive fiscal agent in India’s complex economic landscape.

GLOBAL CONTEXT DEMANDS MORE FLEXIBILITY

From 2009 to 2020, global inflation remained low, interest rates were near zero, and the rules of international trade followed structured protocols under institutions like the WTO. But that’s no longer the case.

Today, the global economy is fraught with tariff wars, unilateral policy changes, and disruptions in currency stability and trade flows. This increased global unpredictability has impacted even stable institutions like central banks.

For RBI, these conditions mean volatile returns on its foreign investments and unpredictable forex inflows or outflows. An expanded CRB allows the RBI to adjust its risk buffers based on the turbulence in international markets and helps safeguard its balance sheet integrity.

THE NECESSITY: DECLINING PROFIT FROM FOREX SALES

Now, let’s discuss why the expansion of the CRB range was necessary—not just sensible.

Previously, RBI used to revalue its forex reserves monthly, which meant it did not show profits on the sale of these reserves. But in 2019, the Jalan Committee recommended halting revaluation. Since then, whenever RBI sells dollars, it earns a profit based on the difference between the historic average acquisition cost and the current sale rate.

This led to significant income between FY20 and FY22, where the profit per dollar sold averaged ₹15-16. But this profit has been sharply falling:

• FY23: ₹8 per dollar

• FY25: Just ₹6.5 per dollar

• Future estimate: ₹1-2 per dollar

This decline is because as more old dollars are sold, the average cost of acquisition rises, narrowing the profit margin. With this route for generating surplus shrinking, the RBI needs an alternative mechanism to ensure a steady dividend to the government.

By allowing CRB to be as low as 4.5%, RBI can ensure that even with reduced forex profits, it can smooth out the dividend payouts using lower buffer provisioning. This would avoid any sudden drop in government revenue due to falling central bank profits.

HOW RBI BALANCED IT IN FY25

For FY25, RBI has sold nearly $400 billion in forex reserves, earning a massive ₹2.5-2.6 lakh crore. With this, the RBI could afford to keep the CRB at the upper limit of 7.5%, holding back excess income and ensuring fiscal prudence.

However, in the upcoming FY26, with forex profit margins projected to fall further, RBI will likely lower the CRB to 6.5% or even 5%, thereby releasing more surplus to the government despite the lower forex-related income.

This dynamic adjustability of CRB ensures RBI’s dividend policy becomes more responsive, predictable, and less reliant on forex movements—a much-needed evolution given the current economic uncertainties.

A NOTE ON RBI’S ROLE

It’s crucial to remember that central banks are not meant to be income-generating bodies for governments. Their role is to ensure monetary stability, control inflation, and manage liquidity.

RBI’s surplus transfer, therefore, is best treated as a tool for counter-cyclical fiscal management—to be used cautiously and strategically, not as a regular revenue stream.

Experts suggest that RBI’s dividend should remain capped at 0.5%-0.75% of India’s GDP, ensuring it doesn’t become a source of long-term inflation while still supporting government spending when truly necessary.

CONCLUSION: A WELL-TIMED POLICY TWEAK

The expansion of the CRB range to 4.5%-7.5% is a strategic move in India’s monetary governance. It addresses:

• Short-term constraints from falling forex sale profits

• Medium-term flexibility in fiscal planning

• Long-term inflation control through prudent monetisation

By embracing this wider range, the RBI can better navigate both global economic shocks and domestic fiscal requirements, making it a more agile and responsive central bank.

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