The Reserve Bank of India’s historic dividend of Rs 2.11 lakh crore, equivalent to 0.6 percent of GDP from its operations in FY24, surpasses the anticipated 0.3 percent of GDP in the FY25 interim budget, announces Fitch Ratings.
“The larger-than-expected Reserve Bank of India (RBI) dividend to the government should help to ensure the 5.1% of GDP deficit target for the fiscal year ending March 2025 (FY25) will be met and could be used to lower the deficit beyond the current target” says Fitch Ratings.
This windfall will also aid the new government in meeting its short-term deficit reduction targets.
Factors Contributing To Increased Profits
Fitch further notes that a key factor contributing to the increased RBI profits seems to be higher interest revenue on foreign assets, although a detailed breakdown from the central bank is awaited.
Following the election budget, the new government now faces two options. It could either maintain the current deficit target at 5.1 percent for FY25, by utilizing the RBI windfall to bolster infrastructure spending or it can offset unexpected spending increases or lower-than-expected revenue, such as from divestments.
Alternatively, the government may choose to save all or part of the dividend to lower the deficit below 5.1 percent of GDP. This July budget will provide greater clarity on its medium-term fiscal priorities.
While RBI dividend transfers to the government can significantly impact fiscal performance, but they also hinge on various factors, including the size and performance of assets on the central bank’s balance sheet and India’s exchange rate.
The transfers may also be influenced by the RBI’s perspective on maintaining an appropriate buffer level on its own balance sheet.
However, Fitch Ratings also cautions, that the potential volatility of these transfers introduces considerable uncertainty regarding their medium-term trajectory, and they do not think, that dividends as a percentage of GDP will be sustained at such elevated levels.