has adopted a risk management framework which indicates the level of equity the rbi needs, given the risks it faces. the dividend policy of the rbi then becomes a technical matter of how much residual surplus is available each year after bolstering equity. frameworks thus reduce the space for differences. the rbi ’ s role in macroeconomic stability is, however, still fuzzy. while rbi clearly has responsibility for the safety and soundness of credit institutions and the stability of the external account, there are some areas that are hazier. for example, with an inflation focused framework, the rbi ’ s ability to be accommodative depends on fiscal prudence from the center and states. how much should the rbi warn on fiscal profligacy, including the building up of contingent liabilities, and when should such warning be seen as interfering in the legitimate decisions of the elected representatives of the people? this is an area where clarity would be useful. strengthen oversight the freedom the rbi has to take operational decisions such as the fcnr ( b ) swap arrangement, albeit invariably in consultation with the finance ministry, is important. however, there are always government entities that are seeking oversight over various aspects of the rbi ’ s activities. multiple layers of scrutiny, especially by entities that do not have the technical understanding, will only hamper decision making. instead, the government - appointed rbi board, which includes ex - officio government officials as well as government appointees, should continue to play its key oversight role. in this regard, all important rbi decisions including budgets, licenses, regulation, and supervision are now either approved by the board or one of its sub - committees. vacancies in the rbi board, which have remained unfilled for many months now, should be filled quickly so that the full expertise and oversight of the board can be utilized. it is also important that parliament understand what the central bank is doing. the governor and deputy governors interact regularly with various parliamentary committees, but we have also initiated a six - monthly interaction with the parliamentary standing committee on finance, where the governor reports on the activities of the bank, and the committee offers its views and concerns. rank of rbi governor there is a reason why central bank governors sit at the table along with the finance ministers in g - 20 meetings. it is that the central bank governor, unlike other regulators or government secretaries, has command over significant policy levers and has to occasionally disagree with the most powerful people in the country. it is dangerous to

##apitalized entirely if only the rbi paid a larger dividend to the government. let me explain why matters are not so simple. if what follows is complicated, trust me, it is. but pay attention, students, especially because it is about your money. i am sure you will understand. how does the rbi generate surplus profits? we, of course, print the currency held by the public, as well as issue deposits ( i. e. reserves ) to commercial banks. those are our fixed liabilities. as we issue these liabilities, we buy financial assets from the market. we do not pay interest on our liabilities. however the financial assets we hold, typically domestic and foreign government bonds, do pay interest. so we generate a large net interest income simply because we pay nothing on virtually all our liabilities. our total costs, largely for currency printing and banker commissions, amount to only about 1 / 7th of our total net interest income. so we earn a large surplus profit because of the rbi ’ s role as the manager of the country ’ s currency. this belongs entirely to the country ’ s citizens. therefore, after setting aside what is needed to be retained as equity capital to maintain the creditworthiness of the rbi, the rbi board pays out the remaining surplus to the rbi ’ s owner, the government. the rbi board has decided it wants the rbi to have an international aaa rating so that rbi can undertake international transactions easily, even when the government is in perceived difficulty – in the midst of the taper tantrum, no bank questioned our ability to deliver on the fcnr ( b ) swaps, even though the liability could have been tens of thousands of crores. based on sophisticated risk analysis by the rbi ’ s staff, the board has decided in the last three years that the rbi ’ s equity position, currently around 10 lakh crores, is enough for the purpose. it therefore has paid out the entire surplus generated to the government, amounting to about rs 66, 000 crores each in the last two years, without holding anything back. this is of the order of magnitude of the dividends paid by the entire public sector to the government. in my three years at the rbi, we have paid almost as much dividend to the government as in the entire previous decade. yet some suggest we should pay more, a special dividend over and above the surplus we generate. even if it were legally possible to pay unrealized surplus