What the RBI’s Annual Report Reveals Beyond the Record Surplus

A month has gone by since the Annual Report of the Reserve Bank of India was unveiled for public scrutiny. As with every such release, snippets and sound bites went into sensory overload, abuzz only with its bottom line: surplus transfer to the government. 

Now that, as Rudyard Kipling would have put it, ‘the tumult and the shouting dies, the captains and the kings depart’, it is apposite to sift through the Annual Report’s key messages objectively and free of emotion to discover how this monumental transfer came to pass.  Many of the secrets of the temple of money are actually revealed in the treasure trove of the Annual Report through analysis and prospecting of the Indian economy’s outcomes and outlook; and how the multifarious functions of the RBI shaped this evolution, each of them in the form of an accountability report: the goals set for the year under review; performance appraisal; and the mission for the year ahead. 

Given the capital and provisioning framework, the surplus transfer arises from the underlying flows of income and expenditure. Hence, understanding their nuances is crucial. In that context, two technical niceties become important. First, it is prudent to take a longer-term, rather than a ‘point-in-time’, perspective in order to distinguish structural characteristics, durable trends and deviations or alignments from flashes in the pan. 

Here, the decade from 2015-16 to 2025-26 is selected. Second, these flows are in billions of rupees. Illustratively, the RBI’s balance sheet size was ₹92 trillion at the end of March 2026, more than a fourth of India’s GDP (Chart 1). Hence, scaling to an appropriate base makes analysis readable. 

Income Dynamics
For instance, a highlight of the 2025-26 accounts is the year-on-year growth of total income by 26.4% (blue line in Chart 2). The rate of earnings on foreign currency assets rose year-on-year as yields hardened worldwide, with the RBI pursuing an active diversification strategy. Net income from interest on rupee securities also increased by 38%, mainly on account of an increase in holdings due to open market purchase operations to infuse liquidity into the system. 

Is it a record? It does have a rising profile in the post-pandemic years, but it is nowhere near the peak growth of 147% in 2018-19 when income from foreign sources increased by 174% on account of the rise in yields and interest rates across all currencies. In consonance, net income from domestic sources increased by 132% on account of double-barrel liquidity management (injection) operations, resulting in an increase in coupon income due to expansion in the portfolio of rupee securities through outright open market purchases, and net income on interest under LAF/MSF operations due to an increase in net liquidity supply to the banking system. 

It was a year when capital outflows triggered by global trade tensions and faster-than-anticipated normalisation of the US monetary policy exerted downward pressure on the domestic currency. Consequently, forex operations by the RBI sucked out domestic liquidity. Large currency expansion was another feature throughout the year, exacerbating the pressure on system-level liquidity. 

The 2025-26 total income growth also underwhelms in comparison to 2022-23, when income from foreign sources increased by 70% on account of a jump in the rate of earnings on foreign currency assets year-on-year. Net income from domestic sources also increased, albeit more modestly, as the RBI employed its LAF facilities to compensate for declining liquidity in the banking system. 

So then, is the expansion in the RBI’s income in 2025-26 insignificant relative to the trend and not worth the cynosure of public attention that it drew? Here is where the scaling exercise separates the chaff from the grain. The ratio of income to GDP has entered a post-pandemic upswing that has eclipsed both the near-term peaks of 2022-23 and 2018-19. This buoyancy set in during 2018-19 but was interrupted by the pandemic. Thereafter, the catch-up took hold.

What drove this surge? Interest income has always been the dominant component, constituting more than 70% of total income, on average, over the last ten years. Interest on holdings of rupee securities, which accounted for close to three-fourths of interest income and more than 100% in 2021-22, has been giving way in the ensuing years to interest income from foreign securities as the RBI began stockpiling foreign exchange reserves in the backwash of strong capital inflows. 

In fact, interest income from holdings of rupee securities was more than twice that earned from foreign securities up to 2020-21 and three times in 2021-22. By 2025-26, their shares were about equal. Is that set to change as foreign capital shuns Indian shores? Or will interest income from foreign securities continue its inexorable upward course if the AI theme fails to inspire global portfolio allocations in the wake of the re-opening of the Strait of Hormuz, easing India’s vulnerability to imports passing through it?

Yet another structural shift is underway since 2021-22, around which evidence of a watershed is gathering – the predominance of interest income among the sources of the RBI’s earnings is receding in the face of the steady rise in other income, producing a veritable mirror inversion (blue and orange lines in Chart 3). This is being driven by an upsurge in exchange gains from foreign exchange transactions (grey line; RHS) since 2018-19, reflecting the RBI’s interventions in the foreign exchange market during periods of exchange rate appreciation as in 2019-20, 2020-21, 2021-22 and 2023-24, as well as, during periods of depreciation in 2018-19, 2022-23, 2024-25 and 2025-26.  

Buffer Management
Another aspect of the RBI’s accounts for 2025-26 that has been conscientiously noted is the rise in expenditure by 102%, outpacing income growth (Chart 4). Expenditure growth has been on a roller-coaster since 2019-20, driven almost entirely by provisions towards contingency risk buffers. 

In fact, this has become the single largest component of the RBI’s expenditure in recent years, coinciding with the adoption of the economic capital framework. While there has been an enhanced sensitivity to the risks faced by the RBI in its various operations, the framework has also imparted volatility to expenditure changes.  

In 2025-26, provisions went to cover the expansion in the balance sheet. Higher unrealised losses on revaluation of foreign securities, foreign exchange forward contracts and rupee securities were also charged to the contingency fund (CF), though these were reversible on the first working day of the following accounting year. It is perhaps under these trying circumstances that the contingency risk buffer was kept at 6.5% of the balance sheet. 

A much saner profile emerges, however, when income and expenditure are scaled to GDP. The RBI’s income has always outstripped its expenditure, providing the wherewithal for surpluses to be transferred to the government (Chart 5). A movement towards convergence was observed during 2019-22, when available realised equity (capital; reserve fund; CF; asset deployment fund) fell to 5.5% of the balance sheet (Chart 7). Thereafter, the resilience of income took over, enabling the realised equity ratio to rise to 6% in 2022-23, 6.5% in 2023-24 and 7.5% in 2024-25.

Before moving on, it is worthwhile to consider how much the RBI spends on its productive workforce, which generates its buoyant income, enables framework-based provisioning, and contributes over 40% of the non-tax revenue and over 90% of the dividend receipts of the Government of India. The answer is shocking: just about 7% of total expenditure in 2025-26 (Chart 6)! 

This has been a striking feature since 2019-20, when provisions towards the CF were increased sharply to replenish the depletion caused by the acceptance of the recommendations of the Bimal Jalan Committee, under which risk provisions amounting to ₹526.37 billion were written back from the CF to income.

An academic question that has made its way into discussions is: what if the RBI had made provision towards the contingency risk buffer of 7.5% of its balance sheet, as in 2024-25 (Chart 7)? After all, its balance sheet expanded in 2025-26 for the first time after four successive years of consolidation from the bloated outcome of 2020-21 due to the fight against the pandemic. 

The surplus transfer would have amounted to a little over ₹1.94 trillion, a decline of close to ₹740 billion from the previous year and the first such decline since 2021-22, when principal-agent relationships were reported to have frosted over. 

Finally, or perhaps just to provide a cadence to the ending refrain: is the RBI’s surplus transfer too large? This theme has long vexed public opinion, as seigniorage is, in the final analysis, a tax on the people via inflation. 

To assess this, it is worth turning to a literature that addressed the theme squarely when it excited public discussion, much as the negative equity of a central bank does today. The excerpt from the 1996 book titled Central Banking in Developing Countries: Objectives, Activities and Independence by Maxwell Fry, Charles Goodhart and Alvaro Almeida reads as follows: 

“In flow terms, we can think of the central bank as the government’s golden goose. With an unimpaired balance sheet:

• The free-range goose conducting conservative monetary policy with a fair amount of independence produces golden eggs in the form of seigniorage worth 0.5% to 1% of GDP.

• The battery farm goose, bred specially for intensive egg-laying, can produce golden eggs in the form of an inflation tax yielding 5% to 10% of GDP.

• The force-fed goose can produce revenue of up to 25% of GDP for a limited period before the inevitable demise of the goose and the collapse of the economy.

All three forms of central bank geese have been sighted in recent years.” 

(Country examples have been omitted for sensitivity reasons).

Against this metric, how does the RBI fare (Chart 7)? 

So far, a conservative free-ranger, exercising a fair degree of independence in the conduct of monetary policy!