RBI's New Record: How Dividend Payout More Than Doubled And What's Next?

The Reserve Bank of India's record dividend to the central government could have mostly come from high income from the forex holding of the central bank, according to SBI Research.

RBI's surplus transfer to the government for the financial year 2024 is based on the Economic Capital Framework as per recommendations of the Bimal Jalan committee, the brokerage said in a May 22 note. "The sharp jump in the surplus amount could be attributed to higher income from the forex holding of the central bank, among other factors."

The Reserve Bank of India said that it will pay Rs 2.1 lakh crore—the highest-ever surplus—as dividend to the central government for fiscal 2024.

The surplus income for the central bank was decided by its liquidity adjustment facility operations and interest income from its holding of domestic and foreign securities, SBI said.

Balances under the daily liquidity adjustment facility show that RBI was in absorption mode for the most part of the financial year and that it absorbed liquidity for 259 days out of the 365 days, SBI said. "The average absorptions add to RBI expenses under LAF."

Increase in the price of gold also added to overall expansion in RBI balance sheet, according to SBI.

The windfall revenue of 0.4% of GDP could see three possible fiscal outcomes, according to Emkay Global Research:

• Lower fiscal deficit/GDP by 0.4% of GDP and nearly Rs 1 lakh crore cut in dated market borrowings.

• The government may choose to spend the whole payout and could split them equally/disproportionately between revenue and capex, without altering the fiscal deficit/GDP target.

• A blend of the two options, where they partially spend the bonanza and partially use it to reduce market borrowings and fiscal deficit.

However, Emkay thinks there is merit in the government solely wanting to lower the fiscal deficit, as they have targeted an aggressive consolidation in the financial year 2024-25.

Overall, this move will lead to a fall across the sovereign and corporate cost curves and should help keep upward momentum in the bond market, Emkay said. "Bull steepening trade is making a comeback in the near-term, especially as easier liquidity in the order."

The higher-than-budgeted RBI surplus transfer would help to boost the GoI's resource envelope in FY2025, allowing for enhanced expenditures or a sharper fiscal consolidation than what was pencilled into the Interim Budget for FY2025, according to Aditi Nayar, Chief Economist, Head of Research and Outreach, ICRA Ltd.

"However, the additional spending may be difficult to be incurred within the 8-odd months left after the Final Budget is presented and approved by Parliament," Nayar said.

The higher dividend is positive for the government's fiscal consolidation plan per the interim budget to narrow the deficit to 5.1% of GDP in F25BE, Morgan Stanley said in a note. "This could also increase the probability of reducing overall government borrowing if other revenue collection is in line with estimates."

This RBI dividend is huge, according to Andrew Holland, chief executive officer, of Avendus Capital Public Markets Alternate Strategies. He is not sure why the markets are not reacting. For the banking sector, and construction companies its going to be great and is going to bring the bond yield down, he said.

No one was saying that the fiscal deficit was bad before and therefore the government will most likely end up spending the money, Holland said.

Here is what brokerages have to say about the RBI's dividend.

• Potential sources of higher profits could be gross spot sale of forex reserves ($153 billion), higher interest income.

• Could have transferred Rs 35,000 crore more if it had not raised contingency buffer to 6.5% of assets (6.0% in fiscal 2022-23).

• Extra fiscal space of 0.3% of GDP to be decided between higher spends or reducing fiscal deficit in final budget.

• Election related sluggishness in government spending could mean higher government cash surplus.

• More steps in the form of near-term GSec auction cancellation/reduction cannot be ruled out.

• RBI approved all-time high dividend of Rs 2.1 lakh crore (0.6% of GDP) versus Rs 87,400 crore (0.3% of GDP).

• More than double the government's dividend estimate of Rs 1.02 lakh crore.

• Contingency risk buffer was increased to 6.5% in the current year.

• Higher dividend is positive for fiscal consolidation plan to narrow deficit to 5.1% of GDP.

• Increased probability of reducing overall government borrowing.

• RBI’s record high dividend is likely to result in a ~0.4% of GDP fiscal windfall.

• Risk of a slightly lower fiscal deficit target in the final budget.

• Believe is largely owing to higher interest income on its foreign securities holdings.

• The government has two options: retain the FY25 fiscal deficit target and spend more or reduce the target.

• We acknowledge the risk of a slightly lower deficit target in the final budget.

• Liquidity impact: This is a meaningfully positive surprise for total system liquidity.