DM Deshpande
The RBI has declared a dividend payable to the government; it is for the second year in succession that the payout far exceeds the government’s own expectations.
As against the budgeted dividend receipt of Rs 2.56 lakh crore for FY25, the actual amount is
Rs 2.69 lakh crore. This is 27% more than previous year’s receipt of Rs 2.11 lakh crore. The government will be quite pleased with this development as it helps it to tide over some pressing demands that have arisen due to the internal needs and trade related issues emerging in external scenarios.
However, due to such large payments some doubts have been expressed about the autonomy of the RBI. Whether the apex bank is toeing the line of the government in order to keep it in good humor is a related question that needs to be addressed.
The balance sheet of RBI has expanded significantly over the years. The surplus too, from which the dividend is declared, has increased. In addition, the decision to transfer Rs 2.69 lakh crore as dividend is not an ad hoc or an arbitrary decision. It is based on the Economic Capital Framework (ECF) which is reviewed recently and recommended a higher contingency reserve buffer (CRB) of 6% +/- 1.5% of the balance sheet.
In keeping with this, reserve has been enhanced to 7.5% as a result of which the dividend amount has undershot the market expectations. However, this is certainly a prudent measure considering the global uncertainties related to trade, energy prices and geopolitical tensions.
The Jalan Committee had suggested a buffer ranging between 5.5% to 6.5%. The FY 24 dividend amount to be transferred was based on CRB of 6.5%, higher than the 6% of the previous year. Hence, the RBI has acted independently and prudently in the matter. As the government is the owner, it gets the dividends when it is declared by the board.
Time and again, the premier bank has stressed that this could be one-off large pay outs and that the government should not expect it to be a certain source of regular income. It is also pertinent to note that while other central banks in the world have struggled to meet both ends meet-some have actually made losses-the RBI has declared record dividends. Therefore apart from certain favourable conditions, the RBI carried out its obligations efficiently. That is why higher surplus accrued to it in FY25.
The bumper payout was enabled by robust gross dollar sales, higher foreign exchange gains and steady increases in interest income. Clearly sale of dollars by the RBI of $415 billion during the year has yielded a huge surplus, an estimated average of Rs.6.50 per dollar. It translates to Rs 2.7 trillion in Indian currency.
In Sept. last year the foreign exchange reserves had reached a peak level of $704; it was also the period in which the apex bank was active in the market. During the course of the year Indian rupee came under pressure and the RBI had to intervene by its open market operations. In doing so, it has made a killing. However, it will be naive to expect that such conditions will again repeat in FY 26 or in subsequent years.
Central banks are not in the business of aiming at making profits like any other commercial organization. If the RBI is left with surplus in any year, it is due to its prudent financial management even while fulfilling its mandate of preventing wild currency fluctuations.
According to a SBI research report, the government will be left with Rs 70,000 crore. Hence, the government can trim its borrowings which will have a positive impact on bonds. Potentially it can reduce the fiscal deficit by 20 basis points to 4.2% of the GDP if it is unspent and other things remain unchanged. However, that may not be a desirable course.
Private investment is still not picking up as they complain of lack of visibility as far as demand is concerned. Hence, the government needs to do the heavy lifting as it has done during Covid time. If the government accelerates the capex spending in the first half of the year, then perhaps, things may turn around during the second half.
The dividend received will act as a cushion against any shortfall in tax and non tax revenues accruing to the government. The ongoing trade war is causing global disruption and it is only imperative that the government faces it with a stronger financial position. War with Pakistan was short, yet it may make more demands on augmenting defence and military requirements.
Already the government is in talks with Russia for an additional order of S-400 missile systems. Indian defence exports too may get a boost as already there have been enquiries from several interested nations. But these deals are expensive and time consuming. Hence, India will probably see more capital expenditure related to defence before registering a sizeable jump in export revenues.
The RBI has done its job of ensuring adequate liquidity in the system. So far, it has infused Rs 8.5 lakh crore since last December with an objective of maintaining liquidity of 1% over net demand and time liabilities. Now it will look at the government to expedite capex spending and take a back seat. The RBI remains highly conscious of creating excess liquidity in the economy that may fuel inflation. The ball is in the government’s court.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh.
