UPSC Prelims 2025 Q2: Sources of Income of the RBI — Explained
Which of the following are the sources of income for the Reserve Bank of India?
I. Buying and selling Government bonds
II. Buying and selling foreign currency
III. Pension fund management
IV. Lending to private companies
V. Printing and distributing currency notes
Select the correct answer using the code given below.
- I and II only
- II, III and IV
- I, III, IV and V
- I, II and V
Answer: (a) I and II only
Statement-wise explanation
- I: correct — The RBI holds a large stock of government securities (G-secs) and earns interest on them. It also books profit or loss when it buys and sells them in open market operations. In 2024-25, interest on its rupee securities was ₹85,524.67 crore (RBI Annual Report 2024-25). This is one of its two biggest sources of income.
- II: correct — The RBI buys and sells dollars and other currencies to manage the rupee, and it earns interest on the foreign securities in its reserves. In 2024-25, its net exchange gain from foreign exchange transactions was ₹1,11,143.38 crore. Interest on foreign securities was ₹97,006.66 crore. Large dollar sales at good rates were a main reason for the record surplus that year.
- III: incorrect — The RBI does not manage pension funds for the public, so it earns no income from this activity. The National Pension System and pension funds are regulated by the Pension Fund Regulatory and Development Authority (PFRDA), and licensed pension fund managers run the money. The RBI's own staff pension fund is an employee benefit, not a business that earns money.
- IV: incorrect — The RBI is the banker to banks and governments. It does not lend to commercial companies. It lends to banks through the Liquidity Adjustment Facility (repo) and gives Ways and Means Advances to governments. Private firms borrow from banks and markets, not from the central bank.
- V: incorrect — Printing banknotes costs the RBI money. 'Expenditure on printing of banknotes' is an expense item in its accounts, ₹6,372.82 crore in 2024-25. The RBI charges no fee for distributing currency. Issuing notes helps the RBI only indirectly: notes are a liability that pays no interest, and the RBI uses that money to buy assets that do pay interest. The income comes from those assets, which are covered by statements I and II.
How to eliminate
Rule out the clearly non-RBI activities first. Basic knowledge is enough to reject III (pensions are PFRDA's area) and IV (the RBI lends to banks and governments, not companies). Rejecting III removes two options at once, since both (b) and (c) contain it, and rejecting IV removes them as well. That leaves 'I and II only' or 'I, II and V'. To choose between them, you need to know one fact: printing currency is a cost for the RBI, not a source of income. It shows up as an expense in the RBI's income statement. The common trap is to treat 'printing money' as earning money. Remember that the RBI earns from the assets it holds (G-secs and foreign assets), not from making the notes.
Know more
How the RBI earns, and where the money goes
The RBI is not run for profit, but its balance sheet earns a large income. Its liabilities are mostly cheap: currency in circulation pays no interest. Its assets earn returns: rupee G-secs and foreign currency assets. The gap between the two is the RBI's income.
| Head (RBI accounts 2024-25) | ₹ crore |
|---|---|
| Interest on rupee securities | 85,524.67 |
| Interest on foreign securities | 97,006.66 |
| Net exchange gain on forex transactions | 1,11,143.38 |
| Total income | 3,38,308.09 |
| Expense: printing of banknotes | 6,372.82 |
| Surplus payable to Centre | 2,68,590.07 |
Income sources:
- Domestic: interest on G-secs; gains on OMO sales; interest on repo lending to banks under the LAF.
- Foreign: interest on foreign bonds and deposits; gains from selling forex reserves (bought cheap, sold dear).
Main costs: printing notes, staff costs, interest paid to banks under reverse repo and the Standing Deposit Facility, and provisions to the Contingency Fund.
Seigniorage: this is the gain from issuing money that costs less to produce than its face value. For the RBI, the gain is earned through the assets bought against currency, not through printing itself.
Surplus transfer: Section 47 of the RBI Act, 1934 requires the RBI to pay the balance of its profits to the Central Government after provisions. Since 2019, the Economic Capital Framework (from the Bimal Jalan Committee) has set how much risk buffer the RBI keeps before it transfers the rest. The Centre books this transfer as non-tax revenue (dividends and profits) in the Budget.
In the news
The RBI transferred a then-record surplus of ₹2,10,874 crore to the Centre for 2023-24 (approved in May 2024). This put the spotlight on how the central bank earns, especially from forex and G-sec operations. A larger transfer of ₹2,68,590 crore came just before the 2025 Prelims.
NCERT Concepts to Revise
- Open market operations: Buying and selling government bonds is done through open market operations, so this defines the activity in Statement I.
- Foreign exchange reserves: Statement II concerns dealings in foreign currency, which the RBI holds and trades as part of its forex reserves.
- Economic Capital Framework: This framework decides how much of the RBI's net income is kept as a buffer before the surplus goes to the Centre.
- Non-tax revenue: The surplus the RBI transfers is recorded in the Union Budget as non-tax revenue, which links RBI income to public finances.