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Informist, Monday, Jan. 27, 2025

 

NEW DELHI – The Reserve Bank of India's dividend to the government in 2025-26 (Apr-Mar) may be around the record INR 2.11 trillion it transferred in the current financial year, according to economists, who see the central bank's surplus as a key part of the finance ministry's Budget maths.

 

Over the years, the RBI's dividend to the government has become a crucial part of the latter's revenues, making up nearly 40% of the entire non-tax revenue estimate and more than 6% of revenue receipts in FY25. Just on its own, the RBI's dividend could have financed 13% of the Centre's fiscal deficit this year. The RBI transfers its dividend to the government for a particular year in May of the subsequent financial year.
 

"In FY25, despite rising capital provisioning, the RBI provided a dividend of INR 2.1 trillion, while raising its capital adequacy to 6.5% of its own balance sheet. With no more room to increase capital provisioning, and FX intervention increasing returns, we believe the RBI is broadly on track to announce another high dividend transfer for FY26, given its ongoing increase in investment returns, as well as gains from foreign exchange intervention," Rahul Bajoria, India and ASEAN economist at BofA Securities, said in a note. Bajoria expects the FY26 Budget to estimate the dividend from the RBI at INR 2.4 trillion.

 

As much as 30% of the RBI's total income in FY24 was from the gains it made from its foreign exchange transactions, helping it transfer a record dividend of INR 2.11 trillion in FY25. In FY23, the share of foreign exchange gains in total income was an even larger 44%. However, this figure is set to be substantially higher in FY25 thanks to the central bank's heavy defence of the rupee's exchange rate amid rising outflows.

 

As per latest data, the RBI had sold $196 billion in the first eight months of FY25, up 73% from the same period of FY24. For all of FY24, its dollar sales amounted to $153 billion, down from the record sales of $213 billion in FY23. The central bank generates a pure profit every time it sells dollars or other foreign currencies from its reserves, with the profit being the difference in the cost of the acquisition of the currency and the price at which it is finally sold.

 

According to economists at Standard Chartered Bank, "A high RBI dividend holds key to the Centre meeting its fiscal deficit targets."

 

"Reliance on RBI dividends has usually been between 0.1-0.4% of GDP; however, this increased significantly to 0.65% of GDP in FY25. Reliance on RBI dividends is likely to remain high at 0.50-0.55% of GDP in FY26 as well, to continue on the path of fiscal consolidation. We think another year of elevated RBI dividends is possible, given large USD sales by the RBI," Standard Chartered Bank said in a report.

 

Weak balance sheet growth may also lower the need for provisions in FY25. As on Jan. 17, the RBI's balance sheet was 1.4% smaller compared to the end of FY24. For any increase in its balance sheet, the central bank must set aside 6.5% as provisions to its Contingency Fund. As such, if the size of the RBI's balance sheet is actually smaller by the end of the current financial year compared to FY24, it may have to write back some provisions.

To be sure, not everyone expects the level of RBI's dividend to be similar to that in FY25. Nomura, for instance, has pencilled in a dividend of INR 800 billion in the FY26 Budget, although it thinks the central bank may finally deliver INR 1.00-1.25 trillion. CareEdge, meanwhile, sees the Budget figure in the range of INR 1.1 trillion-INR 1.3 trillion. The dividend for FY25 could be lower due to reduced interest income on the central bank's holdings of Indian and foreign securities.  End

 

Reported by Siddharth Upasani

Edited by Namrata Rao

 

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