The Reserve Bank of India just released its annual report and in today’s Finshots, we have to explain how the central bank manages its money
The RBI is a not-for-profit organization*. Yet, it made a profit of nearly ₹2.20 lakh crores in FY23!
How on earth did it achieve this, you ask?
Through a simple process called seigniorage.
Now this is just a fancy term for the profits that the bank makes by printing currency. Think about it this way. If the RBI prints a ₹100 note and gives it to a bank for circulation, the bank doesn’t get it for free. It has to ‘buy’ the note and transfer the full face value of ₹100 to the RBI’s coffers.
But here’s the thing. The RBI basically whipped this note out of thin air. The only cost it incurred was probably around ₹2 to print the note. Put another way, the RBI spent ₹2 and created ₹100 in face value and the profit for the central bank is derived from putting that ₹100 to good use. That profit is called seigniorage.
So what does it do with these profits?
Well, it puts the money to work. And tries to make even more money for itself.
For instance, it can lend this money to banks for their daily needs. That fetches interest for the RBI. Then there’s the Indian government which also needs money for its activities. And when the government issues bonds to borrow money from people, the RBI steps in here too. It buys these bonds and pockets a nice sum of interest from the government.
Then it can buy foreign assets. Such as US government bonds. It earns interest and has the benefit of giving the RBI some exposure to the dollar. Or it can just buy and hold dollars by itself. And when the value of the dollar rises, the RBI can act proactively, sell it and pocket the gains. In fact, just by buying low and selling high last year, the RBI made over ₹1 lakh crores in forex trades.
Basically, the RBI prints or creates a bit of money and then uses that to make a whole lot more.
The end result of all this is that the RBI earned a grand total of ₹2.35 lakh crore in FY23 — a whopping 47% higher than the previous year.
It gets to pocket most of this because it doesn’t have too many expenses either. There is the cost to print notes. Then it delegates some form of government-related work to other banks and it pays them a fee for that. And finally, it needs to pay everyone on its payroll. Put together, this comes up to just about ₹15,000 crores.
Oh and since the RBI isn’t really a ‘for-profit’ entity, it doesn’t pay any income tax.
Ergo, the massive profits of ₹2.20 lakh crores!
And what does it finally do with these profits?
Well, the RBI is a prudent money manager. So when it makes a windfall, the first thing it does is save a chunk of it for a rainy day. It pushes money into its contingency fund. Something it can dip into if there’s an unprecedented event that rocks the economy — say if some of its investments fail or a pandemic hits again and we need to protect the banking system.
And this year, it decided to move ₹1.30 lakh crores into this fund to be on the safe side.
Now if you jot these numbers down on a spreadsheet, you’ll see that there’s still money left over. In fact, the net income for the RBI was approximately ₹87,000 crores in FY23.
But it doesn’t really keep this for itself too. Instead, it transfers this to the government as a dividend.
See, typically the government spends more than it earns. It needs to build infrastructure, dole out subsidies for social welfare schemes, and beef up the military… there are a whole lot of expenses. And we end up borrowing money and paying interest on it. So any bonus money really helps. And since the RBI is technically owned by the government, it gets its share of profits too.
So yeah, because the RBI had quite a bonanza this year, not only was it able to build its contingency fund but it could even transfer the nice chunk of ₹87,000 crores to the government as a dividend too.
And now you know how the RBI makes and spends its money.
*Not technically, but let’s just assume that it’s a not-for-profit. Because the RBI’s goal isn’t profits. Rather, it needs to manage inflation and keep it under control so that we don’t have to pay through our noses for stuff. It has to help push growth in the economy. And it also needs to get people to believe in the value of the rupee. Put simply, the goal is to ensure monetary stability. So technically even though RBI can print as much money as possible, it can't keep doing this because it would mess with RBI's ultimate goal - price stability. So please do keep this in mind.
*Correction: We have made a small change to the definition of seigniorage to better reflect its actual meaning after our readers pointed it out.
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