Recent actions by the Reserve Bank of India (RBI) suggest that it may transfer a higher dividend – possibly in the region of ₹1 lakh crore – to the government than last year, giving a potential boost to New Delhi’s finances.
Last week, the RBI announced a steep cut in the government’s borrowing through Treasury Bills, reducing the amount of funds that the Centre would have garnered through these short-term instruments by ₹60,000 crore.
The central bank also took some measures to ensure greater success of an upcoming operation where the government plans to prematurely pay back ₹60,000 crore of earlier borrowings.
Both these actions, which seek to utilise government funds that are currently sitting idle due to election-related constraints on spending, also hint that the Centre’s finances may soon be handsomely replenished.
The RBI, which is the government’s debt manager, is likely to announce the transfer of its surplus funds to the government in late May.
“We expect the RBI to transfer a surplus of INR 1,000 billion (₹1 lakh crore) to the government in FY25… while there are many moving parts in the RBI dividend calculation, our assessment shows a likely repeat of a strong dividend number,” Union Bank of India’s chief economic advisor, Kanika Pasricha, recently said in a research note.
Earnings from Foreign Assets
Calculations conducted by analysts based on public information about the RBI’s balance sheet make a case for the central bank to surpass the surplus transfer of ₹87,416 crore that was given to the Centre last year.
“Totalling up all the operating expenses and subtracting them from total income, we arrive at a surplus (before provisions) of ₹3.4 trillion (₹3.4 lakh crore). Once we account for provisions of ₹2.2 trillion, that leaves us with a dividend of ₹1.2 trillion,” A Prasanna, head of research at ICICI Securities Primary Dealership, recently wrote in a note to clients. “Such a large dividend is likely to be paired with the maximum permissible rise in (the central bank’s) core capital ratio as well, thereby strengthening RBI’s balance sheet for a rainy day.”
Among the key factors that could contribute to a large surplus transfer is a sharp increase in interest that the RBI would have earned through its foreign exchange assets, amid aggressive rate increases by the US Federal Reserve over the last couple of years.
Further, while the RBI’s gross sales and purchases of US dollars were lower in FY24 than FY23 – a year when the central bank intervened heavily in markets to shield the rupee from excessive volatility – analysts still expect a hefty boost to the central bank’s earnings from foreign assets.
