Deciding on RBI’s Dividend of Rs 2.69 Lakh Crore: Could ECF Adjustments Have Increased the Payout? Find Out Here

The Reserve Bank of India Announces Significant Dividend Payout

The Reserve Bank of India (RBI) made a considerable dividend payout announcement on May 23, issuing a dividend worth Rs 2.69 lakh crore for the central government for the financial year 2024-25. This amount aligns closely with the budgeted figures for FY25-26, which factored in dividends from both the RBI and other financial institutions. This development prompts questions around the decision-making process for determining the dividend amount, the funding source, and the factors influencing the central bank’s choice between a generous payout and a more conservative approach.

The RBI’s dividend payout could have potentially been larger were it not for a revision in the Economic Capital Framework (ECF) which altered the risk buffer. While the dividend was higher compared to the previous year due to increased RBI income, it fell short of market expectations due to the revised ECF. The revision, resulting from a periodic review recommended by the Bimal Jalan Committee, enhanced the risk buffer requirements for the RBI. The revised framework grants the central bank greater flexibility in managing transfers over time.

The decision-making on the dividend payout to the government is not solely at the government’s discretion. The Central Board of the RBI, chaired by RBI Governor Sanjay Malhotra, influences the surplus transfer based on the ECF guidelines. The framework, introduced in 2019, specifies that a portion of the RBI’s profits must be retained as risk capital before surplus funds are transferred. The recent adjustment in the ECF led to a larger portion of profits being reserved by the RBI, reducing the surplus transfer potential.

The rationale behind the substantial dividend payout likely stems from significant gains from dollar sales and interest income from securities. Dollar sales, coupled with favorable exchange rate differentials, contributed significantly to the RBI’s earnings. Interest income from both rupee and foreign securities also played a part in boosting the dividend amount.

The surplus generated by the RBI’s dividend payout is expected to provide some fiscal support to the government. However, it is not projected to significantly impact revenue collections for FY25-26. Despite this, the government remains on target to meet its fiscal deficit goal of 4.4 per cent of GDP for the said financial year.