May 25, 2025

The Reserve Bank of India (RBI) has announced a historic move by deciding to transfer Rs 2.7 lakh crore to the government as a dividend for the ongoing financial year. This amount surpasses the previous year's dividend of Rs 2.1 lakh crore and the estimated figure in the budget. The substantial increase in the contingency buffer signifies a more careful approach by the central bank amid global unpredictability and concerns about domestic financial stability. The unexpected payout is expected to have a positive impact on interest rates, with analysts predicting a decrease in yields on government bonds. The actual profit might have been higher since the RBI hiked its contingency risk buffer from 6.5% to 7.5% compared to the previous year, leading to a larger portion of earnings being retained. Several factors contributed to this transfer, including higher revenue from foreign exchange transactions, improved returns on overseas assets, and profits from liquidity operations. Despite choosing to withhold a portion of its earnings, the RBI still managed to make this significant transfer. Aditi Nayar, the chief economist at ICRA, pointed out that the RBI's dividend exceeds the budget assumptions by approximately Rs 40,000 to Rs 50,000 crore, equivalent to 11-14 basis points of GDP. This surplus can act as a cushion for the government to offset lower-than-expected tax or divestment revenues or to manage additional expenditures. The revised nominal GDP figure for FY25 indicates that even with a lower projected growth of 9% in FY26 as opposed to the budgeted 10.1%, the fiscal deficit-to-GDP ratio can be maintained at 4.4%. This allows for a slippage of around Rs 30,000 crore without breaching the target. Madan Sabnavis, the chief economist at Bank of Baroda, pointed out that the dividend payout is larger than anticipated and could provide the government with an additional Rs 50,000 to Rs 60,000 crore in resources. This surplus could help offset potential shortfalls in customs duties due to reduced tariffs, lower tax inflows resulting from slower nominal GDP growth, or unforeseen defense expenses. While the increased dividend provides immediate fiscal relief, Sabnavis cautioned that such significant transfers may not be sustainable annually. The RBI's decision to raise its contingency buffer to 4.5-7.5% to mitigate risks in an uncertain environment underscores the fact that high transfers like this may not occur every year. The size of future dividends will depend on market conditions and the amount set aside by the RBI as reserves.

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Tags: Rbi, Dividend, Government, Economy,