RBI pays government Rs. 87,416 crore bumper dividend

At the just concluded Annual Meeting of the Central Board of the Reserve Bank of India (RBI), it was decided to transfer a sum of Rs. 87,416 crore as surplus / dividend to the Central government. At the same time, the central board also decided to enhance the contingency risk buffer from 5.50% to 6.00%.

How RBI dividends shaped up over the years

Data Source: RBI

But, first a background to the latest round of dividend declared by the RBI to the government for FY23 as revenues of the government for FY24. In the Union Budget, the government normally budgets the dividends of the RBI along with the PSU banks. That amount had been budgeted at Rs48,000 crore for FY24. Now the RBI dividend alone has come in sharply higher at Rs87,416 crore. That means, the total revenue for the government, including the PSU bank dividends should be effectively much higher. This is nearly 3 times the transfer by the RBI to the government in FY22, which was just Rs30,307 crore. In FY22, the RBI board had transferred a substantially large sum money to the contingency reserve, which had reduced its ability to pay out dividends to government. 

That contingency reserve transfer, last year, was done as a precautionary measure since the international bonds held by the Indian government would be subjected to investment depletion due to rising interest rates globally. The higher contingency provision in FY22 was to make up for that, which led to a sharp fall in the dividend paid by the RBI to the government of India. As a result, the actual dividend income of the government from RBI and PSU banks in FY23 was just half of the original estimates. With interest rates globally close to topping out, RBI had the luxury of paying out a higher surplus for FY24.

More than expected, less than desired

In a sense, the dividend / surplus declared by the government for FY24 was more than expected in the Union Budget but less than what the markets desired. Remember, this is the highest transfer since the RBI transferred Rs99,122 crore in FY21. However, the markets had already sensed that the RBI had the leeway to pay more since it had been extremely conservative in the previous year. Estimates for the total dividend payout by the RBI to the government ranged from Rs90,000 crore to Rs160,000 crore. Eventually, the RBI settled at Rs87,416 crore, which is less than desired by the market but more than what had been pegged in the Union Budget. More importantly this will give the much needed relief to the government as revenues from taxes are likely to either taper of flatten in FY24.

What triggered the sharply higher dividend by RBI?

There were several factors that triggered the sharply higher dividend by the RBI to the central government for FY24.

• For the government fiscal year FY23, the RBI transferred Rs30,307 crore to the government. This was sharply lower than expected as a large sum had been transferred to the contingency reserve. That has left the RBI in a more comfortable situation with respect to handling the global risks.

   

• During the year, the RBI heavily intervened in the forex market to defend the rupee. Rupee had fallen last year from Rs75/$ to Rs82/$. During the year, the RBI had to neutralize the situation by selling dollars in the open market. This led to a large surplus realized, which the RBI could transfer to the government coffers. That helped dividends.

   

• During the board meeting over the weekend, the central board of the RBI had reviewed the global and domestic economic situation and associated challenges. This included an evaluation of the impact of current global geopolitical developments. RBI was of the view that the central bank was well buffered to meet the challenges at a macro level.

   

• It was not just the profits from the foreign currency trading that the RBI was transferring this year to the government as dividend / surplus. The RBI had also made substantial surplus lending to the local banking system after the rise in policy rates and liquidity drainage prompted the Indian banks to borrow more from the RBI. The RBI earns an assured spread in such repo transactions.

To sum it up if the surplus of Rs87,416 crore from the RBI is added to the dividends that PSU banks would declare during the year, then the government revenues from this header would end up closer to Rs100,000 crore as against the Union Budget estimates of Rs48,000 crore. In the last part, we will also see the significance of this buffer for the government from a larger perspective.

Finer points of the RBI surplus transfer

While the RBI has been more generous in its dividend to the government, it has also kept its conservatism in place. For instance, in FY19 when the RBI adopted the Economic Capital Framework (based on the recommendations by a committee led by Dr Bimal Jalan), it was required to maintain a contingency risk buffer of 5.5% to 6.5% of its balance sheet. Over the last few year years, it had maintained the contingency reserve at 5.5%, but this year they have raised the contingency reserve to 6% as a conservative move. This will ensure that strong buffers are built in good times.

Coming back to the issue of the surplus of the RBI this year, it was all about the bonanza from dollar selling by the RBI. As per data put out by the RBI, it made large gross dollar sales of $206.4 billion in the first 11 months of FY23. This is in contrast to just $96.7 billion of dollar sales in FY22. More importantly, the surplus from these dollar sales would also be substantial since the profits are calculated on the basis of historical cost of dollar purchase. That would easily pay for the bumper dividend declared by the RBI, without compromising on the risk management aspect.

How this RBI dividend fits into the bigger macro picture?

From a fiscal perspective the dividend payout by the RBI represents additional revenue of 0.2% of GDP. It is estimated that the government has already honoured its 6.4% fiscal deficit target for FY23 and it looks likely to undershoot its 5.9% fiscal deficit target for FY24. It is not just the fiscal deficit targeting but even the RBI surplus should offset other concerns. For instance, there are concerns that GDP growth may taper in this fiscal due to global slowdown. That is likely to impact tax collections. Also, the divestment revenues would be more controlled, considering that India is entering an election year.

In FY23, the government showed its intent by focusing on capex even while cutting down on revenue spending. This ensured that GDP growth stayed robust. For FY24, the higher surplus transfer by the RBI will ensure that government spending on rural and other schemes ahead of elections can be maintained, without compromising on capex spending or even pressuring the fiscal deficit too much. That would be good news on the macro front.