RBI’s Historic Dividend Payout: Insights Into Central Bank’s Profits

The Reserve Bank of India (RBI) has approved a record-breaking dividend of Rs 2.11 lakh crore to the central government for the fiscal year 2023-24. This payout, which is more than double the anticipated amount, comes as a significant boost to government revenue just before the new administration takes office. The RBI’s decision to transfer this surplus was made during its 608th meeting, as per an official statement.

The government had initially budgeted for Rs 1.02 lakh crore in dividends from the RBI, public sector banks, and financial institutions in the interim budget for the fiscal year 2024-25. However, the actual dividend or surplus transfer by the RBI to the Centre for the fiscal year 2022-23 was Rs 87,416 crore. The previous high was Rs 1.76 lakh crore in 2018-19.

The central government aims to contain the fiscal deficit, which is the gap between expenditure and revenue, to Rs 17.34 lakh crore (5.1 per cent of the GDP) during the current financial year. The RBI stated that during accounting years 2018-19 to 2021-22, the Board had decided to maintain the Contingent Risk Buffer (CRB) at 5.50 per cent of the Reserve Bank’s balance sheet size to support growth and overall economic activity, given the prevailing macroeconomic conditions and the impact of the Covid-19 pandemic.

The RBI generates substantial income from various sources, including the printing of currency notes. For instance, if it costs Rs 2 to print a Rs 500 note, the RBI earns a profit of Rs 498 when the note is put into circulation. Additionally, the RBI earns interest from buying and selling government bonds and lending to commercial banks. Profits are also accrued from its dealings in the foreign exchange market.

The RBI can also invest in foreign assets, such as US government bonds, earning interest and gaining exposure to the dollar. Alternatively, the RBI can buy and hold dollars directly. When the dollar’s value increases, the RBI can sell the dollars and make profits. Last year, by strategically buying low and selling high, the RBI made over Rs 1 lakh crore through forex trades.

The higher-than-expected dividend payout is attributed to several factors, including higher interest income on domestic and foreign securities, significantly high gross sale of foreign exchange, and limited drag from liquidity operations compared to the previous year. The increase in the price of gold has also contributed to the overall expansion in the RBI’s balance sheet.

The record dividend from the RBI is seen as opening up fiscal options for the government. It is estimated that the windfall will yield a substantial fiscal boost, equivalent to around 0.4% of GDP. This influx of funds presents both opportunities and challenges for fiscal management, as the government must decide whether to use the additional resources for increased spending or to reduce the fiscal deficit.

In navigating this fiscal bonanza, there arises a compelling case for the government to adopt a strategic approach. This includes considering a mix of measures such as reducing the fiscal deficit, rationalizing borrowing, and judiciously retaining a portion of the windfall to mitigate unforeseen exigencies that may arise in the future.

The RBI’s dividend fulfills two important roles: it provides a substantial income source for the government, helping to close the gap between its expenditure and revenue, and it can also contribute to reducing the fiscal deficit, thereby promoting economic stability. The central bank’s ability to generate profits through various means, including currency printing, bond trading, and foreign exchange dealings, enables it to support the government’s fiscal objectives while maintaining its own financial stability.