Is RBI's record surplus transfer to the govt enough to control fiscal deficit from the war shock?

The Reserve Bank of India (RBI) will transfer a record Rs 2.87 lakh crore in surplus to the union government for the financial year 2025-26, which will be crucial for the government in its fiscal management, but whether it will be enough to help the government meet its fiscal deficit target will have to be closely watched.   While this year’s surplus transfer by the RBI is more than last year’s surplus transfer of Rs 2.69 lakh crore, it is lower than the Rs 3.16 lakh crore that the government had estimated in the Union Budget in February this year from total dividend from public sector companies and surplus transfer from the central bank.   Economists had expected the RBI to transfer anywhere between Rs 2.7 lakh crore to around 3.1 lakh crore to the government this year.   This transfer comes in the backdrop of the US and Israel war on Iran, which has led to crude oil prices surging to over $100 a barrel and disrupted supply chains. The surge in energy prices has put a lot of strain on the economy, and the rupee has been in a tailspin against the US dollar amid the macroeconomic worries and massive selloff by foreign institutional investors from India’s equity market.   The surplus transfer from the RBI will be helpful for the government in its fiscal management to an extent.   RBI reported a 26.42% rise in gross income for 2025-26, while expenditure before risk provisions was up 27.60%.   For FY26, RBI’s net income, before risk provision and transfer to statutory funds, stood at Rs 3.96 lakh crore, compared with Rs 3.13 lakh crore in FY25. The central bank’s balance sheet expanded 20.61 per cent to Rs 91.97 lakh crore.   The revised Economic Capital Framework (ECF) provides flexibility to maintain the contingent risk buffer (CRB) between 4.5% and 7.5% of the size of the balance sheet.   Considering the current macro-economic scenario, the RBI will transfer Rs 1.09 lakh crore towards CRB for 2025-26, which is more than double the Rs 44,862 crore it transferred towards CRB in 2024-25. RBI will maintain the CRB at 6.5% of the size of its balance sheet.   “Transferring a higher amount to the CRB will help in RBI intervening in the financial market as per the evolving domestic and global macroeconomic conditions,” pointed Devendra Kumar Pant, chief economist at India Ratings and Research.   He noted that RBI’s surplus transfer to the government would have been higher had it limited the CRB to last year’s level.   The war in West Asia, which has sent oil prices surging and the rupee tumbling, is expected to put a lot of pressure on government finances. In this backdrop, foreign portfolio investors have also been massively selling. This year, up to May 22, FPIs have pulled out Rs 2.22 lakh crore from the equity market, which is significantly more than the Rs 1.66 lakh crore that they sold in the entire 2025 calendar year.   As they pull out their funds, dollar demand surges. This, along with the higher price that India has had to pay for imports of oil, gas, precious metals among many other things, puts pressure on the rupee, which has depreciated more than 6% this year against the greenback. This week, the rupee hit a record low of 96.90 against the dollar, before intervention in the forex market by the RBI pulled it back to a close of 95.73 on Friday.   In March 2026, as oil prices soared, the government slashed excise duty on petrol and diesel by Rs 10 per litre. Petrol and diesel prices have since been raised twice in May. The close to Rs 4 hike in petrol and diesel prices over two phases may still not be enough to offset the under-recoveries of oil marketing companies, market experts have said and expect more hikes. Risks to a surge in consumer inflation have also risen, and there is growing expectation that the monetary policy committee of the RBI will raise its key repo rate by 50-75 basis points this year.   Separately, the government has also raised excise duty on gold and silver to 15% from 6% as it looks to curb precious metals imports, in the wake of the sharp rupee depreciation.   The record surplus transfer by the RBI should help the government shore up its finances.

The RBI payout reflects the RBI’s strong income position and balance-sheet strength and gives the Centre room to support priority spending, while helping keep the fiscal deficit  under control, felt Jyoti Gadia, MD of Resurgent India.

Some economists feel the government will find it tough to contain the fiscal deficit in the current financial year at the budgeted 4.3% of GDP.     “As compared to the Budget estimates, the fiscal is expected to remain under pressure owing to expectations of higher fertiliser and fuel subsidy requirements, and lower tax collections and oil marketing companies’ dividends,” said Aditi Nayar, chief economist at ICRA.   There will be some cushion from the economic stabilisation fund and customs duty hikes on gold and silver imports, but Nayar still expects the government to exceed the budgeted fiscal deficit target of 4.3% by 40 basis points, assuming an average crude oil price of $95 per barrel in the financial year. On Friday, brent crude prices were around $104-105 per barrel.   Upasna Bhardwaj, chief economist at Kotak Mahindra Bank opined that the surplus transfer was marginally lower than expected thereby “limiting the levers for government in terms of managing the fiscal slippage risks.”   “While, we do not see extra borrowing risks for now, we continue to monitor the extent of subsidy and tax growth slowdown,” she said.