RBI’s record dividend of ₹2.11 trillion to help Centre’s FY25 fiscal deficit, lower bond yields

The record ₹2.11-trillion dividend for FY24 announced by the central bank on Wednesday is expected to help the government meet its fiscal deficit target for FY25. The move also had an immediate impact on bond yields, with the 10-year benchmark yield falling below 7% after the announcement.

The dividend for FY24 is 141% higher than the ₹87,416 crore of dividend payout in fiscal year 2022-23.

“The Board...approved the transfer of ₹2,10,874 crore as surplus to the Central Government for the accounting year 2023-24,” the Reserve Bank of India (RBI) said in a statement.

The FY24 dividend is also higher than both the government’s budgeted and analysts’ estimate of ₹1 trillion. In the interim budget of fiscal year 2024-25, the government had budgeted a dividend of ₹1.02 trillion from RBI, state-run banks and other financial institutions.

The record dividend is expected to help the Centre achieve its fiscal deficit target of 5.1% of gross domestic product (GDP) for FY25. The current dividend, paid in May 2024, will be accounted for in FY25 by the government.

Aditi Nayar, chief economist and head of research and outreach at rating agency Icra Ltd, said that the higher-than-budgeted RBI surplus transfer would help boost the Centre’s resources in FY2025, “allowing for enhanced expenditures or a sharper fiscal consolidation than what was pencilled into the Interim Budget for FY2025”.

The decision was taken at the 608th meeting of the Central Board of Directors of the RBI held under the chairmanship of governor Shaktikanta Das.

The board reviewed the global and domestic economic scenario, including risks to the outlook, said the statement.

Multiple benefits

The RBI board also decided to raise the contingency risk buffer (CRB) to 6.5% from 6% previously as the economy remains robust and resilient, it said.

The contingency risk buffer is a specific provision fund kept by the central bank primarily to be used during any unexpected and unforeseen contingencies. These unforeseen contingencies could include depreciation of securities values, risks from monetary rate policy changes, systemic risks to the system, etc. It is typically in the range of 5.5-6.5% of RBI's balance sheet.

“Higher interest rates both on domestic and foreign securities, significantly high gross sale of forex, along with limited drag from liquidity operations compared to the previous year have probably led to such a whopping dividend,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

“Positively, this comes with the contingency risk buffer being kept at the higher end of the statutory requirement. We expect such a windfall to help fiscal deficit ease by 0.4% in FY25,” Bhardwaj added.

The increased dividend from the RBI will offset the government’s lower-than-expected revenue from divestment and other proceeds. It is also expected to help the government cut back on its gross borrowing estimate of ₹14.13 trillion in FY25, helping lower borrowing costs.

The benchmark 10-year bond yield dropped five basis points to 6.99% after the announcement, its lowest level in nearly a year.

“Overall, this is likely to have a positive impact on government yields. We expect 10Y yield to go below 7% in the coming months. Frontloading by FPIs due to inclusion in the global bond index will further lend support,” said economists at Bank of Baroda in a note. FPIs refer to foreign portfolio investors.

According to Icra's Nayar, increasing the funds available for capex would boost the quality of fiscal deficit, but additional spending may be difficult to incur within the eight-odd months left in the fiscal year after the final budget is presented.

Industrialist Anand Mahindra, chairperson of Mahindra & Mahindra and RBI board member, tweeted on social platform X on Wednesday, congratulating the central bank for the record payout.

“It’s important to note that this record amount was declared AFTER increasing the contingency risk buffer to 6.5% from 6%. I would like to compliment @DasShaktikanta & the entire team at the RBI for their diligent & judicious management of this vital institution,” tweeted Mahindra.

Where RBI gets money for dividend payouts

RBI transfers its surplus annually to the government after making adequate provisions for contingencies or potential losses. A significant part of RBI’s surplus comes from its operations in financial markets, when it intervenes to buy or sell foreign exchange. It also earns income from government securities it holds and as returns from its foreign currency assets that are investments in the bonds of foreign central banks or top-rated securities.

Other sources of income for RBI include deposits with other central banks or the Bank for International Settlement (BIS). Additionally, the central bank also earns from lending to banks for very short tenures and management commission on handling the borrowings of state governments and the central government.