How Much of RBI’s Profit Transfer Is Enough

Both historically and conceptually central banks are unique institutions. When the First Central Bank, the Sveriges Riksbank of Sweden, was created in 1668, the primary incentive was to enhance the financial power of the government as it was “chartered to lend the government funds and to act as a clearing house for commerce” (Bordo 2007). Later, the Bank of England was set up in 1694 as a joint stock company to purchase government debt. Over the years, the power of the central banks to issue fiat money made them unique institutions and extremely interlinked with the government. Since that power to issue fiat currency is essentially an outcome of an implicit contract with the government, traditional notions of solvency and liquidity of any private financial institutions may not be valid for a central bank. After all, as long as the central bank can issue paper currency, it can continue to remain liquid and its bankruptcy would mean the bankruptcy of the Sovereign!

If the dependence of the central bank’s existence and its income on the government is so huge, the transfer of dividend of a central bank to the government is mostly a routine matter. But, the recent transfer of the Reserve Bank of India’s (RBI) dividend to the government following the Jalan Committee recommendations seemed to have generated more heat than light.¹ This article looks at some of these issues in perspective.