Is the RBI Quietly Monetising the Deficit with Its Contingent Risk Buffer Move? May 27 2025RBI

RBI’s Contingent Risk Buffer Tweak: What’s Changing?

The Reserve Bank of India (RBI) has recalibrated its Contingent Risk Buffer (CRB) range from 5.5%-6.5% of its balance sheet to a broader range of 4.5%-7.5%. This policy shift, aimed at offering more flexibility for consistent dividend transfers to the central government, has triggered a fresh round of debate on whether this move hints at a silent form of deficit monetisation.

What is the Contingent Risk Buffer?

The CRB is essentially a financial cushion set aside by the RBI to manage unforeseen risks, including market volatility, economic shocks, or financial instability. It’s part of the RBI’s economic capital framework — the same framework that governs how much of its surplus can be paid out as dividends to the government.

By allowing the buffer to go as low as 4.5%, the RBI potentially frees up additional funds, enabling it to transfer a higher dividend to the government — a move that may help ease fiscal pressures.

Implications for Fiscal Deficit

This timing is significant. The government is in the final stretch of FY25 budgeting and is facing considerable expenditure commitments across welfare schemes, capital investments, and interest servicing. A higher RBI dividend, enabled by a lower CRB threshold, could directly help contain the reported fiscal deficit without having to borrow more from the market.

However, critics warn that this might amount to indirect monetisation of the deficit — a route that, while not illegal, raises red flags about fiscal discipline.

Market Concerns: Inflation and Autonomy

Lowering the CRB limit could also be seen as compromising long-term financial stability in favor of short-term government financing. Some experts worry that reducing the risk buffer now — especially when global economic risks still loom large — could expose the economy to future shocks.

Additionally, if this leads to larger government spending, it could fuel inflationary pressures, especially if productivity does not rise proportionately.

Is RBI’s Independence at Stake?

This decision also brings RBI’s institutional independence under scrutiny. Is the central bank tweaking its internal policies to align more closely with government fiscal objectives? Or is this a pragmatic adjustment meant to provide cushion in extraordinary times?

Historically, any move that makes more RBI capital accessible to the Centre has sparked heated debate — and this time is no different.

Conclusion: Smart Tweak or Slippery Slope?

While the revised CRB range provides short-term fiscal relief, it brings long-term questions around financial risk coverage, inflation control, and institutional independence. Investors, economists, and rating agencies will be closely watching how this unfolds — and whether it leads to structural shifts in India’s monetary-fiscal dynamic.