RBI to pay Rs 87,416 crore dividend to government

RBI pays big dividend to the government

For the financial year 2023-24, the Indian government will have less to worry on the revenues front. The RBI, as a matter of policy, shares part of its surplus with the government each year and this amount is included in the Union Budget document. Thus, the RBI dividend based on the surplus of FY23 will be declared in May 2023 and will be included as revenues in the fiscal year 2023-24 by the central government. In the Annual Meeting of the Central Board of the Reserve Bank of India (RBI), it was officially decided to transfer a sum of  Rs87,416 crore as surplus/dividend to the Central government. However, the RBI has also worked towards making its approach more conservative. To that end, the central board of the RBI has decided to enhance the contingency risk buffer from 5.50% to 6.00%. How does this RBI dividend stack up, and what are the implications of this dividend.

RBI dividends over the last 10 years

In this table below, we capture the dividends (surplus) transferred by the RBI to the central government in each of the fiscal years.

Data Source: RBI

Let us first capture some of the highlights of the above table and why the RBI dividends to the central government have fluctuated over time.

• The table captures the dividend that the RBI has paid to the government in each of the fiscal years. However, in the Union Budget, the government gives a consolidated estimate of dividends receivable from PSU banks plus the RBI. For FY24, the government had pegged total dividends at Rs48,000 crore. With the RBI declaring Rs87,416 crore as dividend, the total dividend under the head would be more than twice the budget.
   
• In FY19, the dividend declared by the RBI to the government was a record Rs1.76 trillion. However, this included a one-time transfer from the RBI reserves to the government as per the recommendations made by the committee headed by Dr Bimal Jalan. Hence that is an exceptional flow of dividends in a particular year and strictly not comparable with other years.
   
• For FY22, which is the last year, the RBI dividend was substantially lower than the budgeted amount at just Rs30,307 crore. That is because the RBI took a decision to transfer over Rs1 trillion to the contingency reserve. This was meant to take care of the notional losses on the global bond portfolio held by the Indian government amidst rising interest rates and bond yields globally.

In a sense, the recent dividend announcement is much better than expected and is likely to boost government revenues. Reports of a higher dividend transfer were already out in the last few days with markets pegging RBI dividends anywhere between Rs80,000 crore and Rs160,000 crore. The dividend eventually may have been less than what the market desired but surely more than what was originally budgeted.

What enabled a higher dividend by the RBI?

How did RBI manage to pay such a hefty dividend to the government this year. There were several enabling factors. 

• In the previous year, the RBI had transferred only Rs30,307 crore to the government. This was sharply lower than expected as a large sum had been transferred to the contingency reserve. With rates almost topping out globally, the RBI sees less of bond depreciation risk in the Indian global bond portfolio. That allowed the RBI to be more liberal with dividend to the central government. There was also the confidence that most of the macro risks were already factored
   
• A big chunk of the RBI surplus came from dollar selling to defend the rupee. RBI normally sells dollars in the spot market out of its reserves to prevent the rupee from weakening beyond a point. In the first 11 months of FY23, the RBI had more than doubled gross dollar sales to $206.4 billion yoy. Since profits are calculated on historical cost of dollar purchase, profits on dollar sales were substantial.
   
• Apart from the dollar selling, the RBI also made a good deal of profits lending to banks in the repo market. This surplus came from lending to the local banking system after the rise in policy rates and liquidity drainage prompted Indian banks to borrow more from the RBI. The RBI earns an assured repo spread in such neutralization transactions.

A combination of domestic and global factors had allowed the RBI to end FY23 with a much bigger distributable surplus.

Why higher RBI dividend is material

For the central government, it is a revenue boost, since the additional dividend payout by the RBI is nearly 0.2% of GDP. It should help the government on two fronts. Firstly, it is estimated that the RBI has honoured its commitment of 6.4% fiscal deficit in FY23. The Union Budget has set 5.9% fiscal deficit target for FY24, and this additional revenue pool should make that journey simpler. 

Secondly, there have been apprehensions that India’s GDP growth may taper in FY24 due to a global slowdown and weak international trade. Year 2024 is an election year, so government would be cautious in disinvestments. This higher dividend payout gives room for the central government to sustain capex outlays and rural spending. That is surely encouraging!

Content Source: RBI