IS RBI GOVT’S TREASURER?

Ajit Ranade

A falling rupee is usually treated as a macroeconomic problem. It raises the cost of imports, worsens inflationary pressures, unsettles investors and dents national pride. But India’s recent experience has produced a curious paradox. The same rupee weakness that creates external stress has also produced a fiscal bonanza for the Union government. The RBI’s defence of the rupee — by selling dollars from its reserves — has yielded large realised profits, which are then transferred to the Centre as surplus. The RBI is thus not merely managing the currency. It is increasingly becoming a fiscal stabiliser, almost a treasurer to the government. This deserves more scrutiny.

The RBI Central Board has now approved a record surplus transfer of Rs 2,86,588 crore to the Union government for FY26. This is higher than the previous record of Rs 2,68,590 crore in FY25, Rs 2,10,874 crore in FY24 and Rs 87,416 crore in FY23. The latest transfer is reportedly backed by robust RBI earnings, including gains from large dollar sales to support the rupee and higher income on foreign assets. Nearly Rs 2.9 trillion is not a rounding-off item. It is close to 8% of the Centre’s revenue receipts. It gives the government fiscal breathing space without raising taxes, cutting expenditure or borrowing more from the market.

At a time of elevated crude prices, geopolitical uncertainty and pressure on fiscal deficit, this is a very useful cushion. But that is exactly why it is worrying. A cushion can quietly become a habit. The arithmetic is simple. The RBI accumulated dollars over many years when the rupee was much stronger. When it sells those dollars today at a weaker exchange rate, it books a rupee gain. This is not merely a paper gain from revaluing foreign exchange reserves. It is a realised gain from actual dollar sales.

Under the economic capital framework, unrealised revaluation gains on gold or foreign exchange are not meant to be distributed. But realised income from forex operations can flow into the RBI’s income and then into its surplus transfer to the government. This means rupee weakness has produced a fiscal windfall. That is an uncomfortable sentence, but it captures the paradox. The same depreciation that hurts importers, raises the cost of oil, reduces India’s dollar GDP and unsettles foreign investors also boosts RBI profits when dollars are sold. This matters for another reason. If India’s nominal GDP grows by 10% in rupee terms, but the rupee depreciates by more than 10% against the dollar, then India’s GDP in dollar terms barely grows. This is not merely statistical trivia. Global rankings, investor perceptions and geopolitical heft are measured in dollars.

A country can grow fast domestically and yet appear stagnant internationally if currency depreciation wipes out the gain. Persistent rupee weakness can therefore become a strategic concern. But that does not mean the rupee must be defended at any cost. India is a current account deficit economy. It imports much more oil, gold, electronics and critical inputs than it exports. It also has a higher inflation rate than the US over the medium term. Some depreciation of the rupee is natural. It can even be desirable.

A weaker currency acts as a shock absorber. It protects export competitiveness, discourages non-essential imports and prevents the economy from pretending that external imbalances do not exist. The danger is not depreciation itself. The danger is disorderly depreciation. That is where the RBI rightly intervenes: to reduce volatility, prevent panic and anchor expectations. But defending a level is different from managing volatility. If the market believes that the RBI will always protect a particular exchange rate, then large importers and dollar borrowers may under-hedge their exposures. An artificially strong rupee subsidises imports, penalises exports and delays adjustment. The eventual correction then becomes more painful. If defending the rupee produces large RBI profits, and those profits help the Centre reduce its deficit, then depreciation begins to have a hidden fiscal upside. That is not a healthy incentive structure.

No government should start treating the central bank’s forex operations as a recurring revenue source. India’s fiscal system already has an inbuilt support mechanism for government borrowing. Through the statutory liquidity ratio, banks are required to invest a substantial share of their deposits in government securities. This creates a captive market for sovereign debt. It is legal, long-standing and part of India’s financial architecture. But it is still a form of financial repression: household savings are partly channelled into government borrowing by regulation. If, in addition, the government becomes dependent on large RBI surplus transfers, the line between monetary authority and fiscal support begins to blur. The RBI is not the finance ministry. Its job is price stability, financial stability, currency management and monetary credibility. It is also a banker to the government, but that should not turn it into the government’s cash cow. Elected governments naturally prefer more spending, lower borrowing costs and convenient financing. That is precisely why monetary institutions need insulation. The rupee story is also linked to India’s external financing challenge. Gross FDI inflows may look healthy, but net FDI has weakened sharply because of repatriation, disinvestment and outward flows. Foreign companies and private equity investors are exiting at attractive valuations. Indian equity markets remain expensive partly because domestic SIP inflows have become sticky and powerful. The SIP habit is good for financialisation and household participation in markets. But it has also created a strong domestic bid that prevents a sharp market correction despite large FII outflows. This raises a sensitive question. Are Indian domestic investors, through SIPs and IPO subscriptions, indirectly facilitating profitable exits for foreign investors?

In many recent marquee IPOs, a large share of the money raised has gone not into fresh capital for the company but into offers for sale by existing investors. New investors buy the promise; old investors take the cash. It is how markets work. But when it becomes widespread, it deserves scrutiny. India is attractive as a market, but not always easy as a place to build, operate and retain capital. This does not mean foreign confidence has vanished. Google’s data centre plans, Meta and Google’s investment in Jio, and other strategic investments show that global capital still wants exposure to India. But there is a difference between entering India for a digital scale and committing patient capital to deep manufacturing. India needs durable FDI, not merely valuation-driven entry and exit. In this context, the rupee is not just a number on a screen. It reflects oil dependence, gold imports, external financing gaps, portfolio flows, domestic market valuations and confidence in doing business. The RBI can smooth the ride, but it cannot permanently change the road.

The writer is a noted economist.