While dividends from central banks have emerged as a key source of revenue for the governments, they have also sparked a debate for various reasons. The most obvious reason could be central banks earning profits despite being money market regulators.
Central Banks hold government bonds and earn interest income from them. They also earn interest and gains from sale of foreign currency bonds and other overseas assets. Central banks also generate interest income via repo operations and other lending to commercial banks. Notably, the interest income charged from central banks carry higher interest rates than those paid on deposits by them. Central banks earn interest from governments as well. Governments often borrow short-term loans from central banks through ways and means advances (WMA). On normal WMA, central banks charge the prevailing repo rate, while over-draft facilities carry higher rate than the repo rate. Another significant source of income is seigniorage, whenever additional currency is issued. Central banks have limited exposure to expenditure, only confined to interest payments on deposits, salaries, rents and other operational costs.
The monetary monopoly and the regulatory character enable central banks to generate surpluses. However, many central banks from developed countries have a track record of incurring losses. The Federal Reserve of US recorded a cumulative loss of US$200 billion from year 2022 to 2024. During the same period, Bank of England recorded an overall loss of US$90 billion, while it was US$160 billion for the Swiss National Bank.
The European Central Bank has also incurred significant losses. These losses stemmed from paying higher interests on deposits while charging lower interests on loans, higher depreciation of foreign exchange currencies held as reserves and loss from sale of bonds at market prices against purchase cost.
The monetary monopoly and regulatory role of central banks generally enable them to generate surpluses. However, several central banks in developed economies have also experienced significant losses in recent years. The US Federal Reserve recorded cumulative losses of nearly $200 billion between 2022 and 2024. Over the same period, the Bank of England reported cumulative losses of around $90 billion, while the Swiss National Bank posted losses of nearly $160 billion. The European Central Bank also incurred substantial losses.
These losses were largely driven by higher interest payments on deposits relative to the interest earned on loans, sharp depreciation in the value of foreign exchange reserves and losses arising from the sale of bonds at market prices below their acquisition cost.
Except for gains or losses from operations outside their own country, the gains of central banks are mostly notional and can be viewed as generated through the system itself. By rule, central banks must use surpluses to pay dividends to their governments, which are their shareholders. However, before paying dividends, central banks use a part of their surplus to create reserve buffers. These reserves are used for contingencies, asset development, realization and currency management. Central banks with past losses first use the surplus to cover previous losses. They also institute funds for specific purposes such as financial stability, payment systems and research and development.
Reserve Bank of India (RBI), by virtue of Section 47 of RBI Act, is required to transfer its surplus to the Union government. Economic Capital Framework (ECF) has mandated RBI to maintain Contingency Risk Buffer (CRB) between 5.5 per cent to 7.5 per cent and, then, transfer the entire surplus balance to the government.
ECF was set up in the year 2019, with a mandate for periodic review every five years. The first 5-year review was took place in May 2025, which recalibrated buffers and formalized new surplus transfer rules.
In 2025, RBI maintained 7.5 per cent CRB but lowered it to 6.5 per cent in the year 2026. This lowered CRB enabled RBI to declare record dividend of Rs. 2.87 lakh crore for 2025-26 against Rs. 2.69 lakh crore in corresponding previous year.
This US$30 billion dividend by RBI is higher than the collective dividend payment by India’s 30 top dividend paying listed companies. It is also more than 90 per cent of the budgeted non-tax revenue under dividends/ surplus head. This dividend is about 0.7 per cent of India’s GDP and highest ever such share.
Apprehensions emerged if the government influenced RBI to lower reserve buffers, adopt accounting practices that inflate notional gains or conduct monetary operations in a manner aimed at generating larger surpluses and, consequently, higher dividends for the government.
RBI’s support to rupee with gross sales of US$195 billion and net sales of US$53 billion gave huge surplus to RBI since those dollars were previously purchased at a lower price.
While support to rupee against dollar may not be unjustified, this exercise is generating more surplus to RBI and more dividend to government. As government spends this higher dividend amount, the rupee weakens further against the dollar. This equation could be a mere paradox.
The RBI may have to explore alternative approaches to strike a balance and avoid criticism that risk buffers are being compromised, higher dividends are being driven by notional income, the government alone benefits from larger payouts and elevated dividend transfers could add to inflationary pressures.
Despite these apprehensions and criticism, RBI deserves appreciation for maintaining resilience, profitability, contributing higher dividend to the government and for being the most active and agile central bank in the world.
