Valuation Gains Power RBI’s Record Surplus As FX Margins Contract

The Reserve Bank of India’s surplus transfer to the government has drawn attention for what it did not deliver—a windfall for the exchequer. The central bank transferred a record ₹2.69 trillion as surplus for 2024-25, but fell short of the market expectations of ₹3.0-3.5 trillion. On the face of it, the lower number appeared to reflect higher provisioning towards the Contingency Fund. But a closer reading of the RBI’s accounts reveals a more layered story: valuation gains, not so much forex trading gains, drove the central bank’s balance sheet strength this year.

Why did the surplus disappoint despite a record year of dollar sales? The record sales of foreign exchange by the RBI had raised hopes of a sharply higher dividend. The RBI sold a record $398.71 billion in the foreign exchange market in 2024-25, more than double the $153 billion sold the year before. Though the gross foreign exchange sales rose 161% in 2024-25, the forex trading gains rose just 33% to ₹1.11 trillion.

The FX trading volumes were exceptional, but income depends on spreads and volatility. The margins on the trade have been coming down. A back-of-the-envelope calculation shows, spread between RBI’s average sell and buy price for dollar has narrowed to below 3 rupees in 2024-25 from above 5 rupees in the previous year. This is partly because the rupee’s depreciation slowed to 1.5–2.4% annually over the past two years, compared with 3.5–8.6% in the five years prior. Increased intervention led to shorter dollar holding periods, translating to narrower spreads and smaller gains. 

While forex trading disappointed, another source quietly lifted RBI’s earnings. This was interest income from foreign securities.

Interest income from foreign securities jumped 48% year-on-year, raising foreign income’s share in total earnings to 77%, up from 68% a year earlier. Although global central banks softened their stance, the average yields on 5- to 10-year US treasuries were 2-20 basis points higher in 2024-25 compared to the previous year. The share of interest income from foreign securities has increased to 29% of RBI’s total earnings in 2024-25 from 24% a year before.

This was not the most visible factor, but it proved pivotal in a year when the pace of growth in income from forex gains slowed.

Valuation Reversal
The real swing factor came from valuation gains on reappraised investments.

Amid the bond rout of 2022 following the Ukraine conflict, RBI’s Investment Revaluation Account-Foreign Securities, or IRA-FS, had posted sharp losses, forcing a drawdown of the contingency fund. The tide turned in 2024–25. As global yields softened, the IRA-FS debit shrank from ₹1.43 trillion to ₹813.67 billion.

Any credit balance in IRA-FS is carried forward to subsequent accounting year, while debit balance in IRA-FS, if any, at the end of the financial year, is charged to Contingency Fund and is reversed on the first working day of the following accounting year. 
The lower debit balance in 2024-25 unlocked valuation gains of over ₹618 billion. The timing was critical. The RBI had just raised the upper limit of its Contingent Risk Buffer to 7.5% of total assets from 6.5%, requiring an additional ₹1.14 trillion in provisions. The reduced drag from IRA-FS allowed the RBI to meet this demand while still delivering a record surplus—with just 5% higher provisioning than the previous year.

Still, can the RBI count on similar tailwinds next year?

Outlook Uncertain
With bond yields expected to stay low, interest income may plateau. Forex trading could remain muted if volatility stays low and the rupee stable.

There is also the unspoken risk that RBI may have to allow more rupee depreciation in view of the global trade uncertainties. Such moves could have wider policy implications.

Valuation gains helped the RBI navigate a difficult year. Whether they can do that again will depend on market conditions and how the central bank interprets shifting global signals.

For now, the RBI has achieved fiscal generosity without compromising prudence. The question is whether the RBI can repeat it next year.