The issue of dividend transfer by the Reserve Bank of India (RBI) to the Government of India is customarily seen as a routine measure. But given the wide range of the dividend amount ranging from `33,110 crore in FY 13 to `2,10,874 crore in FY 24 (see Table 1), this issue has evoked extensive debates and discussion across the development spectrum not just because of the customary concerns about the health and robustness of the RBI’s balance sheet per se but also more importantly because of their monetary and fiscal implications. While this record dividend provided distinct tailwinds to stock and bond markets and the government’s fisc, it was not entirely unexpected provided the RBI’s balance sheet and market activities were duly factored in an objective assessment of the evolving situation.
Given the impact of this huge dividend on the fiscal deficit, borrowings estimated at `14,13,000 crore in FY25 in February’s vote on account and public expenditure, this issue assumes greater significance in the context of the presentation of the Union Budget in July 2024.
The dividend payout decision was taken at the 608th meeting of the RBI’s Central Board of Directors held under the chairmanship of Governor Shaktikanta Das. The RBI said “as the economy remains robust and resilient, the Board has decided to increase the CRB to 6.50 per cent for FY 2023-24. The Board thereafter approved the transfer of `2,10,874 crore as surplus to the Central Government for the accounting year 2023-24”.
The Board reviewed the global and domestic economic scenario, including risks to the outlook. It also discussed the working of the RBI during the FY 24 and approved the Annual Report and financial statements for the year 2023-24. The RBI said “the transferable surplus for the year (2023-24) has been arrived at on the basis of the Economic Capital Framework (ECF) adopted by the Reserve Bank on August 26, 2019 as per recommendations of the Expert Committee to Review the extant Economic Capital Framework of the Reserve Bank of India (Chairman: Dr. Bimal Jalan). The Committee had recommended that the risk provisioning under the Contingent Risk Buffer (CRB) be maintained within a range of 6.5 to 5.5 per cent of the RBI’s balance sheet”.
The 608th meeting was attended by Deputy Governors Dr Michael Debabrata Patra, M Rajeshwar Rao, T Rabi Sankar, Swaminathan J and other Directors of the Central Board – Satish K Marathe, Revathy Iyer, Anand Gopal Mahindra, Venu Srinivasan, Pankaj Ramanbhai Patel and Dr Ravindra H. Dholakia. Ajay Seth, Secretary, Department of Economic Affairs and Dr Vivek Joshi, Secretary, Department of Financial Services, also attended the meeting.
Dissecting the Balance sheet-Reading between the lines
The RBI has a unique operational nature, which distinguishes it from typical banks or financial entities.
The surplus is the net income derived from the total income (sources of income) minus total expenditure (expenses). Out of the surplus of RBI, risk provisioning is made for monetary and financial stability risks, and credit and operational risks. The RBI transfers its surplus to the government as per Section 47 of the RBI Act, 1934.
An examination of the structure and dynamics of the RBI’s balance sheet reveals that higher interest rates both on domestic and foreign securities were welcome contributors to the surge in income. A major component of the RBI’s income stemmed from its foreign currency holdings held in US bonds and treasuries, with a small portion in Euro, Swiss and Yen bonds. Since the average US Fed funds rate doubled from about 2.5% in FY23 to 5% in FY24, the RBI gained an incremental 2 percentage points on all its foreign bond holdings in FY24 vis-à-vis FY23. According to the US Department of the Treasury, as of March 31, 2024, the RBI has invested $240.6 billion in US Treasuries. The high yields on these bonds, due to monetary policy tightening, hugely enhanced interest income for the RBI from foreign assets. No rocket science this; one may even be tempted to say a la Sherlock Holmes “elementary my dear Watson”!
The RBI’s foreign currency reserves rose by $61 billion (the highest in five years) from $509 billion to $570 billion as of March 31, 2024. In rupee terms, its foreign currency investments rose from a stock of `41.9 trillion in March 2023-end to `47.2 trillion in FY24-end. With 3% average return on a bond portfolio of `47.2 trillion, the RBI’s interest earned works to `1.42 trillion. This interest amount of `1.42 trillion has, however, to be adjusted for a fall in bond prices.
Secondly, the RBI’s intervention in the forex market and the sale of dollars also constituted another major source of earning. The RBI gross sold $153 billion in FY24 (it net bought more because its reserves rose by $61 billion in FY 24). There is an asymmetry here because when the RBI sells dollars it calculates its purchase price as the average price of all dollars bought historically (presently estimated at around `75–76/$) whereas the sale price would have been higher by `8 at `83/$ leading to a neat sum of `1.2 trillion.
The RBI would, however, have lost some revenue on its domestic market operations since it absorbed money for 259 of the 365 days in FY24. But the RBI would have made `0.8-1 trillion on the interest earned on its Indian government bond holdings of `13.5-14 trillion in FY24 while making allowance for any loss due to a fall in prices.
Further, interest from liquidity operations supported RBI earnings as the banking system switched back into deficit mode from September 2023, after three years of surplus. The increase in the price of gold also led to the overall expansion of the RBI balance sheet. Clearly, then, the RBI’s adroit funds management skills made a killing variously estimated at between `3 trillion to `3.5 trillion on foreign currency sales, with interest of foreign bond holdings and also the revaluation of gold reserves. Despite the hefty dividend of `2.1 trillion, the contingent risk buffer was bolstered from 6% to 6.5% to strengthen financial stability by providing adequate headroom by higher risk provisioning. This prudent measure will help to meet operational, monetary and credit risks caused by contagion risk from sudden financial market volatility and emergence of sectoral and macro-economic vulnerabilities stemming from real and worrisome fault-lines.
Macroeconomic Implications
The government had budgeted a receipt of `1.02 lakh crore as dividends from the RBI, public sector banks and financial institutions in the interim budget for the FY 25 presented in February 2024. Hence this unforeseen bonanza would shore up revenues for the government will help in meeting any shortfall in disinvestment receipts and create space for funding welfare programs.
While the use of this money will be carefully watched, sizable dividend, together with a high cash surplus may allow the Finance Ministry to reduce its bond sales, aiding lower borrowing costs. The Finance Secretary (FS) TV Somanathan justifiably maintained “this dividend is good for the revenue of the government, for the fiscal position of the government”. The FS noted that while cash inflows can be transient, revenues in any form, including dividends, increases the government’s financial strength. He also explained that any decision to initiate buyback programs depends on the attractiveness of yields. In the event of tight liquidity conditions, the government would receive favorable offers for its bonds. He said, “We will only buy those bonds back which come with yields which we like. We will keep doing things pragmatically to manage our cash”.
Looking Ahead: Challenges and Expectations
This money is likely to provide an impetus to the move for prudent fiscal consolidation (reducing fiscal deficit by 0.4% in FY25) and enhancing the funds available for capex. This would ensure fiscal deficit reduction remains in sync with the committed glide path of 4.5% by FY26. Should this resource pool be dissipated in additional spending, a higher money supply would strengthen the inflationary impulses. There is a distinct possibility that while maintaining the fiscal deficit at 5.1% of GDP, spending, for capital expenditure- roads, railways, and defence projects- could rise.
The stock markets benefit because of higher government expenditure and hence increased economic growth. Higher capex will benefit construction and infrastructure stocks. The bond market has already indicated its bullishness with the yield of the 10-year bond moving towards 7%. This implies higher treasury profits for banks. Hence, the RBI dividend is positive for bank stocks.
Conclusion
While the fiscal calculus gets smoothened, the RBI needs to provide undivided focus on the basic objectives of central banking in India. There has to be an accent on absorption of excessive liquidity by the RBI by undertaking open market operation sales and foreign exchange interventions, enhancing the government’s tax-to-GDP ratio, the rationalisation of GST rates and fast tracking the disinvestment in the public sector to discernibly improve the ground-realities.
There is little doubt that over the years, despite the ebb and flow of monetary conditions, the vicissitudes and the travails of transition, the RBI has effectively discharged the mandate it has been charged with and secured the safety of its balance sheet in conformity with international best practices. The RBI has always passed the litmus test and there is no reason to believe that it will not do so now.
ABOUT THE AUTHOR
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
