RBI's Record Dividend of ₹2.1 Lakh Crore: A Boon for Fiscal Deficit Reduction

In a significant financial development, the Reserve Bank of India (RBI) has approved a record dividend payout of ₹2.1 lakh crore to the government for the fiscal year 2023-24. This unprecedented surplus transfer is set to play a crucial role in trimming the fiscal deficit for FY25, easing it by approximately 0.2% of GDP, according to analysts.

This amount is much higher than both the budgeted (Rs 1.02 lakh crore announced in the Interim Budget for FY2025, including dividends from banks and financial institutions) and market expectation of Rs 1-1.1 lakh crore surplus, and would come as an unexpected boost to the government’s fiscal position.

Fiscal Impact and Government Targets

The substantial dividend is a welcome relief for the government, which has set an ambitious target in the Interim Budget for FY2025 to reduce the fiscal deficit to 5.1% of GDP, down from 5.8% in FY24. Gaura Sen Gupta, Chief Economist at IDFC First Bank, noted, “The higher dividend represents additional fiscal revenue of 0.4% of GDP. Considering potential shortfalls in disinvestment receipts and moderate tax collection growth, the FY25 fiscal deficit could undershoot the Budget Estimate by 0.2% of GDP.”

Details of the Dividend Payout

The RBI’s decision to transfer ₹2,10,874 crore was made during its 608th Central Board of Directors meeting held in Mumbai. This transfer includes an increase in the Contingent Risk Buffer (CRB) to 6.5% from 6% in the previous year. The CRB serves as a financial cushion for economic crises, reflecting the RBI's role as Lender of Last Resort (LoLR).

Revenue Sources and Economic Context

The higher dividend is partly due to increased revenue from the Variable Repo Rate (VRR) auctions, which provided banks with funding support amid tight liquidity conditions throughout the year. Madan Sabnavis, Chief Economist at Bank of Baroda, explained, “RBI earned revenue at 6.5% on an average deficit of ₹1.5-2 lakh crore through VRR auctions, aiding in the higher dividend payout.”

Revaluation gains on forex reserves, higher interest rates on both domestic and foreign securities, and substantial gross sales of foreign exchange also contributed to the RBI’s increased surplus. V Ramachandra Reddy, Head Treasury at Karur Vysya Bank, described the payout as an “unexpected bonanza,” exceeding market expectations and positively impacting the government’s fiscal position and liquidity.

Historical Context and Comparisons

To put this record payout in perspective, the RBI’s dividend to the government was ₹87,416 crore in 2022-23 and ₹30,307 crore in 2021-22, the lowest in a decade. In FY2021, the transfer was ₹99,122 crore, while in FY2019, the RBI approved a then-record transfer of ₹1.76 lakh crore, which included both a dividend and a one-time transfer of excess provisions.

Conclusion

The record ₹2.1 lakh crore dividend from the RBI not only underscores the robust fiscal health of the central bank but also provides a significant boost to the government's efforts to manage the fiscal deficit. This move will likely support economic stability and enable the government to either enhance spending or reduce borrowing, ultimately benefiting the broader economy.