There are many ways. One of them is called Seigniorage.
Seigniorage is a term for the profits that the RBI makes by printing currency. If the RBI prints a ₹100 note and gives it to the banks for circulation, the bank doesn’t get it for free. They have to buy the note and transfer the full face value of ₹100 to the RBI.
But printing of that note has actually costed RBI probably around Rupees 2. In other way, the RBI spent ₹2 to create ₹100 note and made a profit of Rupees 98. This profit is called seigniorage.
Second way RBI earns is by buying and selling dollars. It buys dollars when it is cheap such as at ₹81 and sells when dollars become costly, for example at ₹83. Buying and selling of foreign currency is known as forex trading. In 2022-23 RBI made over ₹1 lakh crores in forex trades.
The third way the RBI generates revenue is through the purchase and sale of government securities. Government securities are debt instruments issued by the central and state governments to finance their budgets.
When the RBI buys these securities, it injects money into the economy, increasing liquidity. Conversely, when it sells these securities, it absorbs money from the system, reducing liquidity. The difference between the purchase and sale prices allows the RBI to generate income.
Fourth way of RBI’s earning is by providing short-term loans to commercial banks. The interest charged by RBI on these loans generates income for the RBI.
The RBI also provides banking services to the central and state governments, including holding their accounts, managing their cash flows, and facilitating the issuance and redemption of government bonds. The fees charged for these services contribute to the RBI's income.
But what does RBI with all this money? RBI keep some money for meeting its expenses and maintaining certain reserves and then transfers its surplus profits to the government.
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