Mint Explainer: What does RBI’s record dividend payout to the government mean?

Mint explains the implications of the higher-than-expected dividend payout.

What caused the increase in the RBI’s dividend payout?

The RBI has three major sources of income, all of which could have brought in more in FY24. It earns a significant portion of its income through interest from investments in foreign-currency assets. These include bonds and treasuries, and deposits with other central banks and commercial banks in currencies such as the US dollar, euro, British pound, Australian dollar and Japanese yen. RBI data shows investment in foreign-currency assets increased to ₹$570 billion at the end of March 2024 from $510 billion a year earlier.

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The central bank may also have earned more from selling US dollars in forex markets. According to RBI data, it sold dollars worth $153 billion and bought dollars worth $194 billion in FY24. However, this was less than the amount it sold and bought in FY23.

The central bank’s gold holding also increased by around ₹63,500 crore in FY24 from the previous year, a revaluation of which could have increased its income as well.

However, the true picture will only be known once the RBI releases its annual report for FY24 at the end of May. According to SBI's economic research report, the RBI’s income is projected to be ₹3.75 trillion to ₹4 trillion in FY24, as against ₹2.35 trillion in FY23 and ₹1.6 trillion in FY22.

What are the implications of the larger RBI dividend?

The higher-than-estimated dividend is expected to shore up the government’s non-tax revenues. The surplus transfer of ₹2.1 trillion is higher than the FY25 budgeted estimate of ₹1.02 lakh crore, which includes dividends from the RBI, public-sector banks and other financial institutions.

The additional ₹1.2 trillion constitutes nearly 0.3% of GDP, and could thus help lower the fiscal deficit by 30-40 bps to 4.8% of GDP, as against the budgeted estimate of 5.1% of GDP. The impact of this may be seen in the form of lower gross market borrowing by the government if it chooses not to spend the extra dividend.

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The current borrowing target for FY25 has been maintained at ₹14.13 trillion. Lower borrowing could result in further softening of yields. The yield on the benchmark 10-year G-sec has fallen below 7%. The government has already reduced borrowing through treasury bills amid tight liquidity. Lower borrowing by the government this year is therefore likely to increase liquidity in the system. According to RBI data, the liquidity deficit in the system stood at ₹2.5 trillion as of 21 May.

Why did the RBI increase the contingency-risk buffer?

Besides transferring a higher dividend, RBI has also increased the contingency-risk buffer (CRB) from 6% to 6.5% of its balance sheet. It said it took a decision after reviewing the global and domestic economic scenario, including risks to the outlook. “As the economy remains robust and resilient, the board has decided to increase the CRB to 6.5% for FY24," the RBI said on Wednesday.

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The contingency risk buffer is a specific fund of the central bank, meant to be used to combat unforeseen contingencies such as depreciation of securities, risks from monetary-rate policy changes, and systemic risks. It typically comprises 5.5% to 6.5% of the RBI's balance sheet, based on the recommendations of the Bimal Jalan committee on distribution of surplus.