The Reserve Bank may transfer a lesser dividend to the government for FY’2023-24 compared to previous year’s bumper Rs 87416 crore. An explainer on why the dividend will be lower. The budget estimates dividend transfer in FY’2024-25 at Rs 1.02 lakh crore from the Financial sector entities including the Reserve Bank and public sector banks. But a bulk of the dividend flows is from the central bank.
What is the Reserve Bank’s dividend distribution policy?
The Reserve Bank follows the recommendations of the report by a committee headed by former RBI governor Bimal Jalan which has recommended that provisioning in the form of Contingent Risk Buffer (CRB) has to be maintained within a range of 6.5 per cent to 5.5 per cent of the RBI’s balance sheet, comprising 5.5 to 4.5 per cent for monetary and financial stability risks and 1.0 per cent for credit and operational risks. This risk provisioning is made primarily from retained earnings and only then the surplus income is transferred to the government as dividend.
What are the estimates for the central bank’s transfer to the government ?
RBI dividend is expected to Rs 75000 crore to RS 85000 crore this year depending on the provisioning compared to Rs 87416 crore according to estimates by IDFC First Bank. Income is expected to be supported from interest income on foreign securities and rupee securities. Earnings on foreign exchange transactions, which accounts for more than half of the central bank’s income, are expected to be lower with gross dollar sales at $151.4 billion in April-February 2023-34 compared to $206.4billion in the same period a year ago. Why will the government transfer less?
For one the central bank sold fewer dollars than the previous year which brings down the commission income on forex sales. Also its balance sheet grew faster 11.4 percent in FY’24 from Rs 63.4 lakh crore in March 2023 to Rs 70.7 lakh crore in March 2924 compared to 2.5 percent growth in FY’23, which raises the absolute levels of economic capital that the central bank needs to set aside, which in turn brings down the surplus.
What is going to support RBI’s income?
Interest income from foreign securities is likely to rise with expansion of holdings of foreign currency assets. Also income from liquidity adjustment facility or LAF operations could be higher as system level liquidity was in deficit on an overall basis as the during the year was higher. Loans to commercial banks were more than double the last year’s levels at Rs 1.53 lakh crore.
What are the implications of the dividend payout?
The dividend payment (in mid-May) will support government surplus and there-in support government expenditure and liquidity in May 2024, according to IDFC First Bank.
What is the outlook for FY’ 2024-25?
A lot would depend on forex inflows, level of the rupee versus dollar and the system level liquidity. Banking system liquidity is expected to improve in the second half of the fiscal supported by higher capital inflows. Around 60% of the bond index inflows are expected to come in the second half , supporting FPI inflows into debt, according to IDFC First Bank. Other capital inflows are expected to pick-up in the second half as the Fed starts easing rates.
