More Stories

Informist, Thursday, Feb. 20, 2025

 

By Siddharth Upasani

 

NEW DELHI – The importance of the Reserve Bank of India's dividend to the Indian government cannot be overstated. In 2024-25 (Apr-Mar), it made up almost 7% of the Centre's total revenue receipts and could have financed more than 13% of the full-year fiscal deficit of INR 15.70 trillion. So, any action that impacts the money the central bank transfers to the Centre has the potential to upend, for better or worse, India's fiscal math. And one such action is currently underway.

 

Earlier this month, RBI Governor Sanjay Malhotra revealed that an internal review of the central bank's economic capital framework is currently underway. Any changes to the framework will affect the dividend for FY25--the August 2019 recommendations of the Bimal Jalan committee are to be reviewed every five years--which will be transferred in late May.

 

As per the FY26 Budget, the Centre expects to receive INR 2.56 trillion as dividend from the RBI and public sector banks. But if the internal review concludes the RBI must set aside higher provisions, the Indian government may end up with a hole in its exchequer that will be difficult to fill.

 

To be sure, it is not a given that the review will result in an increase in the RBI's risk buffers. "If the (internal) committee feels that there is any change--could be up or down, I am not suggesting that because of uncertainties it needs to be increased, I am not suggesting that--basis that we will take a decision," Malhotra had said on Feb. 7.

 

WHAT'S UP FOR REVIEW

The internal review of the RBI's economic capital framework coincides with heightened global uncertainty. In addition to the war between Russia and Ukraine, the re-election of Donald Trump as US president has thrown the world into chaos, with the tariffs announced and threatened buffeting capital flows resulting in huge exchange rate volatility. This has played out rather visibly in the case of the RBI, whose foreign exchange reserves have slumped by more than $60 billion in the last few months, driven by the central bank's interventions to shore up the rupee.

 

The Jalan committee recommended that the RBI maintain a Contingent Risk Buffer in the range of 5.5-6.5% of its balance sheet as the central bank is the international counterparty of the Indian government and forms the "primary bulwark during external crises". That India, an emerging market nation, suffered from persistent current account and fiscal deficits and was progressively opening its capital account and could face global spillovers were also key considerations. And in the last five years, most of these risks have only increased.

 

While the share of foreign assets in the RBI's balance sheet has remained steady at around 68%, the central bank's holdings of them gave increased over 70% since mid-2019 to almost INR 50 trillion. To further illustrate the massive increase in the scale of the RBI's operations, its gross foreign currency sales in 2018-19 (Jul-Jun) were a mere $35.46 billion. In the first nine months of FY25, the RBI sold $264.62, exceeding the full-year amount for 2018-19 in October ($36.78 billion), November ($51.11 billion), and December ($69.05 billion).

 

Perhaps, it can be argued Oct-Dec was an exceptional phase. However, even the six-month moving average of the RBI's monthly gross forex sales has increased from $2.44 billion in August 2019 to $35.92 billion in December 2024. If the internal review concludes that the risks the RBI must protect itself from have materially increased since 2019, it is likely that the Contingent Risk Buffer will be hiked, which will reduce the dividend it can transfer to the government.

 

IMPACT OF HIGHER PROVISIONS

An increase in the buffer has already seen the government lose out on money in recent years. In May 2023, the RBI's board raised it to 6.0% from 5.5%, which lowered the dividend for FY23 by INR 317 billion to INR 874 billion. Last year, the buffer was again raised by 50 basis points to 6.5%, the upper end of the range recommended by the Jalan committee. This led to a reduction of INR 352 billion in the dividend, as per calculations by Informist; of course, despite the hike in the buffer, the dividend was still a record INR 2.11 trillion.

 

If the RBI's internal review decides the heightened global uncertainties and external risks require greater provisions, the dividend for FY25--which will be transferred in May--could be dented by a similar amount. A key consideration here would be the growth in the RBI's balance sheet, which on the day Malhotra made his aforementioned comments was at 0.8% compared to the end of FY24. Assuming the RBI's balance sheet grows as rapidly for the remainder of FY25 as it has grown in the last two months, an increase in the Contingent Risk Buffer to 7.0% would reduce the dividend to the government by INR 368 billion, all other things held constant.

 

According to ICICI Securities Primary Dealership, while Malhotra's comments "have raised the uncertainty around the (dividend) payout" to the government, the internal review may not necessarily lead to "big changes". "Even if we work with a potential higher capital provision that may require RBI to provision for more capital, we suspect the provision of dividend should still be around INR 2.5 trillion-INR 3.0 trillion in that scenario."

 

Perhaps, there is no cause for concern to the fisc from a minor increase in the RBI's Contingent Risk Buffer. However, if Mint Street thinks wholesale changes are needed to its economic capital framework, the Centre could call for a more expansive examination like it did in 2018, when the Jalan committee was set up.  End

 

US$1 = INR 86.72

 

Edited by Avishek Dutta

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2025. All rights reserved.