RBI’s Dividend of Rs 2.69 Lakh Cr Set to Reduce Fiscal Deficit by 20bps; Experts Stand by 4.4% GDP Target
Record Dividend Transfer by RBI Bolsters Government Finances for FY25
The Reserve Bank of India (RBI) has made a historic transfer of Rs 2.69 lakh crore as a dividend to the Government of India for the financial year 2024–25, providing significant fiscal relief and enhancing the government’s financial latitude. Analysts from SBI predict that this could lead to a reduction in the fiscal deficit by 20 to 30 basis points, possibly lowering it to 4.2% of GDP. This substantial dividend contribution reinforces the government’s fiscal standing for the upcoming financial year.
According to the Union Budget, the expected income from the RBI and other financial institutions was around Rs 2.56 lakh crore. However, with the RBI’s contribution reaching nearly Rs 2.7 lakh crore, the government now enjoys greater fiscal capacity than initially anticipated. This marks the third consecutive year that the actual dividend has surpassed budget projections.
A Notable Increase in Dividend
The RBI’s record dividend signifies a 27.4% increase compared to last year’s transfer of Rs 2.11 lakh crore, highlighting the central bank’s robust financial performance in FY25. Emkay Global Financial Services emphasizes that this enhanced dividend translates into a significant fiscal boost of 0.15% of GDP. Nonetheless, analysts do not foresee a major adjustment to the Centre’s fiscal plans, as the higher dividend is expected to partially offset potential shortfalls in tax revenue and subdued nominal GDP growth.
Maintaining Fiscal Targets
Despite the unexpected increase in dividend, Emkay projects that the fiscal numbers will not shift substantially. They continue to uphold their gross fiscal deficit target for FY26 at 4.4% of GDP, aligning with the original budget estimates. They believe the RBI’s increased dividend will mitigate some potential revenue losses from taxes and slower-than-expected GDP growth.
Anticipated Easing of Yields
Research analysts at Emkay Global Financial Services predict a decline in the 10-year government bond yield to around 6.0% by the close of 2025, alongside a likely shallow yield curve steepening trend in the near future. This decrease in yields is anticipated despite projections of a liquidity surge in the months ahead. Analysts suggest that this surplus liquidity will not impede possible interest rate reductions, particularly in June, nor will it diminish the extent of the easing cycle.
Increased Risk Buffer Implementation
SBI Research highlights the RBI’s decision to ramp up its risk buffer; otherwise, the dividends might have been over Rs 3.5 lakh crore. The RBI’s Board has stipulated that its Contingent Risk Buffer (CRB) should be maintained between 7.5% and 4.5% of its balance sheet. This adjustment represents a prudent approach by the central bank, preparing for unforeseen monetary challenges. The CRB was set at 6.0% for FY23 and 6.5% for FY24, but for FY25, it has climbed to 7.5%.
Factors Driving Surplus Growth
The record surplus of the RBI can be attributed to impressive foreign exchange revenues, proactive dollar sales to stabilize the rupee, and increased interest income from both domestic and international securities. As of September 2024, India’s foreign exchange reserves reached $704 billion. The RBI’s aggressive intervention strategy positioned it as the leading forex seller among Asian central banks by January 2025, thus stabilizing the rupee while bolstering its own earnings.
Surge in Dollar Sales and Securities Earnings
Gross dollar sales witnessed a remarkable rise to $371.6 billion in FY25 (up to February), compared to $153 billion in FY24. Concurrently, the RBI’s income from interest on securities grew, with its rupee securities holdings increasing by Rs 1.95 lakh crore to hit Rs 15.6 lakh crore by March 2025. However, these gains faced some offset due to a downturn in government bond yields, affecting mark-to-market returns.
Calculation of Transferable Surplus
The calculation of the transferable surplus followed the revised Economic Capital Framework (ECF), which received approval from the RBI’s Central Board on May 15, 2025. The Board’s decision to raise the CRB to 7.5% resulted in a decrease in the amount available for dividend distribution. Additionally, the RBI’s surplus was impacted by its Liquidity Adjustment Facility (LAF) operations, initially absorbing excess liquidity in mid-2024 but later transitioning to liquidity injection as demand increased.
Projections for FY26
Looking forward to FY26, experts foresee a continued liquidity surplus bolstered by factors including Open Market Operations (OMO) purchases, the substantial RBI dividend transfer, and an expected Balance of Payments (BoP) surplus estimated between $25 to $30 billion. Consequently, core liquidity could rise to approximately Rs 4.95 lakh crore by the end of May 2025.
