RBI’s FY24 Dividend Transfer Surpasses Expectations, Aids Deficit Reduction

The Reserve Bank of India (RBI) announced a historic dividend transfer of ₹2.11 lakh crore to the central government for the fiscal year 2023-24. This transfer represents a nearly 140% increase from the previous fiscal year’s dividend of ₹87,416 crore. This significant financial move is set to bolster the government's finances, assist in meeting budget deficit targets, and provide stability to the bond markets.

Background

During its 608th meeting held in Mumbai, the Central Board of the RBI reviewed the global and domestic economic outlooks, discussing potential risks and opportunities. The board's decision to approve a ₹2,10,874 crore surplus transfer reflects confidence in India’s economic trajectory.

Over the years, the RBI has maintained a Contingency Risk Buffer (CRB) to support growth and economic activity. This buffer, which was 5.5% of the balance sheet size from 2018-19 to 2021-22, was increased to 6% in FY23 and further raised to 6.5% in FY24.

Key Highlights

Record Dividend

The ₹2.11 lakh crore dividend transfer is unprecedented and significantly higher than earlier expert predictions. Initial estimates had suggested a dividend of over ₹1 lakh crore, but the final amount far exceeded these expectations. This surplus is a testament to the improved financial outcomes and operational efficiencies within the RBI.

Sources of Surplus

Several factors contributed to the substantial surplus:

• High Interest Income from Foreign Assets: The RBI's investments in US Treasury bonds and other foreign securities have yielded high returns due to increased interest rates.
• Surge in Forex Holdings: The central bank’s foreign exchange reserves saw significant growth, reaching their highest level in five years.
• Domestic Earnings: With domestic liquidity entering deficit mode, the RBI earned higher interest from lending to banks.
• Gold Prices: Rising gold prices contributed to the overall expansion of the RBI’s balance sheet.
• Forex Market Interventions: The RBI’s active management and sale of foreign securities also boosted its income​.

Fiscal Impact

This record surplus transfer is expected to ease the government's fiscal deficit by 0.4% in FY25. By providing additional financial resources, the transfer will help reduce borrowing requirements and enable enhanced expenditures, particularly in infrastructure projects such as roads, railways, and defense.

Bond Market Response

The announcement had an immediate positive impact on bond yields, with the 10-year benchmark yield falling below 7%. This decline in yields was driven by the higher interest rates on both domestic and foreign securities and limited drag from liquidity operations compared to the previous year.

Expert Insights

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

Bhardwaj commented that the substantial dividend, along with the higher end of the statutory contingency risk buffer, is expected to help the fiscal deficit ease by 0.4% in FY25. She highlighted that the surplus would provide significant respite to the bond markets by reducing the government's borrowing needs.

Aditi Nayar, Chief Economist, ICRA Ltd.

Nayar noted that the higher-than-expected surplus transfer would boost the government's resources, allowing for sharper fiscal consolidation or enhanced expenditures. This move signifies a strong and stable economic foundation.

Industry Reactions

Prominent industry leaders, including Anand Mahindra, Chairman of Mahindra & Mahindra, praised the RBI’s strategic management and its decision to declare a record surplus while maintaining a robust contingency risk buffer. This decision underscores the central bank’s effective management and foresight​​.

Financial Stability Measures

Alongside the dividend transfer, the RBI has also implemented measures to support financial stability. The increase in the contingency risk buffer to 6.5% ensures that the central bank is well-prepared for any unforeseen economic shocks.

This move aligns with the recommendations of the Bimal Jalan committee, which advised maintaining a CRB between 5.5% and 6.5% of the RBI's balance sheet​.

Broader Economic Implications

The substantial surplus transfer is expected to have several broader economic implications:

• Stimulus for Growth: The additional funds will enable the government to invest in critical infrastructure projects, stimulating economic growth and creating job opportunities.
• Enhanced Fiscal Space: The transfer provides the government with greater fiscal space to manage its expenditures and investments without increasing borrowing.
• Market Confidence: The RBI's effective management and strategic decisions have boosted market confidence, as evidenced by the positive response in bond yields and market sentiments​​.