With a record surplus and a lower risk buffer, the RBI’s balance sheet has emerged as India’s strongest defence against global shocks. AI generated image The balance sheet of the Reserve Bank of India (RBI) is the backbone of India’s macro-financial system. Unlike commercial banks driven by profit, the RBI manages its balance sheet as a sovereign policy instrument directly tied to the broader economy. By regulating currency in circulation and foreign exchange reserves, it influences liquidity, while its banking operations shape credit growth, interest rates, and GDP. Beyond being an accounting record, the balance sheet acts as a lever of stability and growth. It is structured across two divisions. The Issue Department handles currency issuance, with liabilities as currency in circulation, fully backed by gold coins, bullion, foreign securities, rupee coins, and Government of India securities. The Banking Department manages all other central banking functions, serving as banker to the government and commercial banks, administering public debt, and executing monetary policy. Its liabilities include deposits from governments, reserves held by commercial banks to meet Cash Reserve Ratio (CRR) requirements, and the RBI’s Economic Capital. Assets comprise domestic government securities, loans and advances to financial institutions, and foreign currency assets. Equity and reserves are governed by the Economic Capital Framework (ECF), which distinguishes between Available Realised Equity (ARE), including the Contingent Risk Buffer (CRB), Asset Development Fund (ADF), capital, and Reserve Fund and unrealized revaluation balances. This framework ensures rule-based provisioning against monetary, credit, and operational risks before transferring surplus to the central government. Shock Absorber In FY 2025–26, the RBI’s balance sheet acted as a vital shock absorber, protecting the domestic economy from external shocks such as higher U.S. tariffs and rising geopolitical tensions in West Asia. It expanded by 20.61 percent, reaching Rs. 91.97 trillion from Rs. 76.26 trillion in FY25. This sharp rise, equal to 26.4 percent of GDP, represents the highest level in two decades, excluding the exceptional COVID year of FY21. In FY26, the composition of RBI’s assets shifted as domestic holdings grew faster than foreign currency assets. Domestic assets rose to 29.1 percent of total assets by March 31, 2026, up from 25.7 percent a year earlier, while foreign currency assets, gold, and overseas loans declined to 70.9 percent from 74.3 percent in FY25. The surge in domestic investments reflected rising liquidity needs, with the economy expanding 7.6 percent and bank credit growth reaching 16.2 percent by mid-May. To meet this demand, the RBI increased its holdings of rupee-denominated sovereign securities, generating Rs. 1.18 trillion in interest income - a 38 percent jump from the prior year. As a result, net income from domestic sources rose 26 percent year-on-year to Rs. one trillion, underscoring the growing role of domestic assets in supporting monetary stability. The moderation in foreign investments was a direct outcome of RBI’s forex operations. To maintain orderly markets and curb volatility, it intervened heavily across onshore and offshore currency segments, selling a record US$53.13 billion in the spot market. These actions reduced India’s reserves to US$691 billion by March 2026, down over US$47 billion from the peak of US$728.49 billion in February. Despite this decline, the portfolio delivered strong returns, supported by elevated sovereign bond yields in Western markets. Interest income from foreign securities rose to Rs. 1.07 trillion, while amortization of premiums added Rs. 16,354.18 crore. Major Transformation RBI’s gold reserves saw a major transformation in value and custody. Physical holdings rose marginally by 0.94 tonnes to 880.52 tonnes as of March 31, 2026, but soaring global prices and rupee depreciation drove asset values up 63.6 percent, from Rs. 4.32 trillion to Rs. 7.06 trillion. At the same time, the RBI accelerated repatriation, bringing 77 percent of its gold back to India, with the remainder held at the Bank of England and the BIS. This marks a sharp shift from March 2023, when only 37 percent (301.1 tonnes) was domestically stored. The move reflects a strategic safeguard against global risks, underscored by the freezing of US$300 billion of Russia’s reserves. By increasing domestic custody, the RBI has ensured sovereignty and security over India’s core reserve asset. On the liabilities side, RBI recorded growth across all major categories in FY26, driven by currency demand, banking liquidity, and accounting adjustments. Currency notes in circulation rose 11.8 percent year-on-year to Rs. 41.26 trillion, reflecting transaction demand in an economy growing at 7.6 percent real GDP, partly offset by retail payment digitisation. Total deposits with RBI increased 11.6 percent to Rs. 19.17 trillion from Rs. 17.17 trillion in FY25. CRR reduction during the year resulted in commercial bank deposits falling by 18.3 percent to Rs. 8.10 trillion from Rs. 9.02 trillion in FY25. Driven by a 9.5 percent rupee depreciation against the U.S. dollar and rising global gold prices, unrealized gains on foreign assets expanded significantly, requiring offsetting entries in the Currency and Gold Revaluation Account (CGRA). The CGRA serves as a crucial buffer, ensuring these valuation swings do not affect the RBI’s distributable income. In FY26, RBI posted a record surplus, with net income before provisions rising to Rs. 3.95 trillion from Rs. 3.13 trillion in FY25. The surplus transferred to the government jumped to Rs. 2.86 trillion, underscoring the strength of its operations. The key driver was foreign exchange income, which surged 52.2 percent to Rs. 1.69 trillion as RBI sold US$53.13 billion to stabilize the rupee, generating substantial trading gains. Additional earnings included Rs. 1.07 trillion in interest on foreign securities, supported by high global yields. On the expenditure side, interest costs from liquidity absorption nearly doubled to Rs. 19,163 crore, reflecting heavy use of reverse repo and SDF operations. Currency printing expenses fell to Rs. 4,875.20 crore due to supply chain efficiencies, while employee costs rose to Rs. 10,136.31 crore. The ECF allows RBI to maintain its CRB within a flexible range of 4.5 percent–7.5 percent of balance sheet size. In FY26, the CRB was set at 6.5 percent, down from 7.5 percent in FY25, marking the first reduction. Despite the lower ratio, the 20.61 percent expansion in balance sheet size required an additional provision of Rs. 1.09 trillion. Strong financial performance and higher absolute provisioning enabled a record surplus transfer of Rs. 2.87 trillion to the central government. Had the CRB remained at 7.5 percent, the payout would have been lower by nearly Rs. 1 trillion. With fiscal pressures already elevated, such a reduction was undesirable, as the higher surplus helped contain risks of a widening fiscal deficit. Policy Shift This record transfer reflects both a cyclical windfall and a structural policy shift. The Rs. 1.69 trillion earned from foreign exchange transactions was a one-off gain, driven by RBI’s intervention to defend a weakening rupee. In periods of capital inflows and low volatility, such realized gains would be far smaller. By contrast, the reduction of the CRB to 6.5 percent was a deliberate structural choice, moving from the maximum risk-aversion of FY25 back to the midpoint of the ECF range. This adjustment is sustainable only if India’s financial system remains resilient, a condition the RBI expects to continue. The RBI remains among the world’s best-performing central banks, with its balance sheet reflecting national confidence. Forex reserves of US$691 billion covering 11 months of imports and 90 percent of external debt, alongside highly valued gold holdings, 77 percent of which are domestically stored, have created a fortress of financial self-sufficiency. This strength reflects sophisticated coordination of risk management, monetary defence, and fiscal support. The CRB reduction was a calculated trade-off, but strong domestic fundamentals make adverse near-term effects unlikely. With real GDP growth projected to moderate to 6.9 percent in FY27 and inflation risks persisting from volatile crude prices and supply chain disruptions, the RBI’s balance sheet will remain India’s primary monetary anchor. Its institutional discipline continues to serve as a crucial sovereign buffer against rising global uncertainties. (The writer is a Chartered Accountant with a leading company in Mumbai. Views personal.)
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