The Government has just had a windfall in the form of the highest-ever dividend payout the Reserve Bank of India has announced.
Every year, the RBI transfers a certain amount of money to the government, depending on the surplus income it generates from its investments. The RBI's central board, which met on Wednesday, has approved a transfer of Rs 2,10,874 crore as surplus to the central government for 2023-24. This is more than double the Rs 87,416 crore dividend it had transferred in 2022-23 financial year.
What's driving the record surplus payout by the RBI?
The central bank would have earned higher income from its foreign exchange holdings. It would have also earned a higher interest income on domestic as well foreign securities it holds, in the wake of high interest rates in India and abroad.
"Higher interest rates both on domestic and foreign securities, significantly high gross sale of foreign exchange along with limited drag from liquidity operations compared to the previous year have probably led to such a whopping dividend," pointed Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.
The increase in the price of gold also added to the overall expansion in RBI balance sheet, according to Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.
"RBI’s income was Rs 1.6 lakh crore in FY2022 and Rs 2.35 lakh crore in FY2023. For FY2024, it is projected to be around Rs 3.75 to 4 lakh crore. While all other things in the balance sheet are either steady or increasing as per trend, however, foreign investments have increased sharply. Therefore, nearly 60-70 per cent year-on-year increase in RBI’s income is expected to be from interest income from foreign securities as well as exchange gain from foreign exchange transactions," he explained.
How will this big boost to its finances help the government?
"The higher than budgeted dividend transfer by RBI bodes well for India’s fiscal dynamics and will provide a boost to the government’s effort towards fiscal consolidation," said Dipanwita Mazumdar, economist at Bank of Baroda.
In the interim budget on February 1, Finance Minister Nirmala Sitharaman had set a fiscal deficit target of 5.1 per cent of GDP in 2024-25 down from 5.8 per cent last financial year.
Bhardwaj of Kotak expects the windfall to help the government ease fiscal deficit by 0.4 per cent this year.
Ghosh of SBI also expects the dividend transfer to ease the fiscal deficit by 0.3-0.4 per cent.
"The higher-than-budgeted RBI surplus transfer would help to boost the government's resource envelope in FY2025, allowing for enhanced expenditures or a sharper fiscal consolidation than what was pencilled into the interim budget for FY2025," added Aditi Nayar, chief economist and head of research, outreach at ratings agency ICRA.
The government can reduce its dependence on market borrowings, which are currently budgeted at a gross Rs 14.13 lakh crore and help lower borrowing costs, according to Mazumdar.
If the government borrowings are lower, it will soften yields, bringing in respite in the bond market.
The government can also choose to deploy the additional resources for higher spending, preferably for capital expenditure, said Mazumdar.
