The RBI’s Historic Dividend Payout Has Divided Economists: What Does It Mean For India?

Economists’ opinions on the Reserve Bank of India’s (RBI) decision to announce its highest-ever dividend of Rs 2.11 lakh crore for 2023–2024 were divided.

For the fiscal year 2022-2023, the RBI sent a dividend of Rs 87,416 crore to the Center. In 2018-19, the previous peak was Rs 1.76 lakh crore.

Abhirup Sarkar raised concerns that the payout might limit the RBI’s capacity to rescue lenders in the future since the central bank would not have the money to act quickly, despite renowned economist Suman Mukherjee hailing it as a sign of economic strength.

Mukherjee told news agency PTI, “This is not a fluke,” crediting the windfall to a number of interrelated events such as an increase in foreign currency reserves, loans to commercial banks, and the government’s proactive approach to disaster management.

He emphasized that the stock market reached a record high, demonstrating the beneficial effect of RBI development.

Mukherjee talked down worries about interest rates going up, arguing that keeping rates low would mitigate any possible consequences of a recession.

But prominent economist Abhirup Sarkar, a former Indian Statistical Institute professor, has some concerns.

Sarkar raises concerns about the government’s intentions and speculates that reducing the deficit may be the main motivator.

He said that the central bank may have paid the big dividend out of reserves rather than from its profits.

He issues a warning about the possibility of inflation and the effect on certain areas of the real interest rate fall.

In addition, dividends will allow the government to borrow less from the market, which might lower borrowing rates and encourage business investment, Sarkar told PTI.

He did, however, issue a warning over the inflationary effects of adding liquidity to the market, predicting a drop in real interest rates that would be detrimental to retirees and other people who depend on interest income.

The possible deterioration of the RBI’s independence and financial stability is Sarkar’s main worry.

Former West Bengal State Finance Commission chairman Sarkar expressed worries that the RBI’s record dividend will undermine the organisation.

In order to deal with crises, such as saving failing banks, the RBI needs war chests, as Sarkar emphasizes.

He voiced concerns that the RBI would not have enough cash on hand to intervene right now if the dividend limits its future potential to save banks.

The economist warned that it would make it more difficult to control liquidity via open market operations and foreign exchange interventions meant to stabilize the rupee in the future.

Sarkar worried that the RBI’s independence was being undermined by the government.

He expressed doubts about the government’s efforts and emphasized the need to protect the RBI’s independence and effectiveness in preserving financial stability.

Support for Ratings: Should India Use RBI Dividends to Lower Its Fiscal Deficit?

An S&P Global Rating analyst said on Thursday that India may earn “rating support” in the long run if it uses the Reserve Bank’s largest-ever dividend of more than Rs 2 lakh crore to lower its fiscal deficit.

“The RBI is paying out an extra 0.35 percent of GDP in dividends. YeeFarn Phua, an analyst at S&P Global Ratings, told PTI that “whether it would support the narrowing of the fiscal deficit in fiscal 2024–25 would really depend on the final budget that would be passed after the June election results.”

According to Phua, in an email interview from Singapore, there might be income shortages in areas such as divestment proceeds or greater allocation to expenditures in the final budget, so the higher dividend from the RBI could not necessarily result in a complete drop in the deficit.

But “we believe it will lead to a faster path of fiscal consolidation that, in turn, will provide rating support over time,” Phua said, “if it does lead to a full decrease of the deficit.”

S&P Global Ratings confirmed India’s sovereign rating at “BBB-” in May of last year, citing low GDP per capita and unsatisfactory fiscal performance as vulnerabilities. The rating agency also gave India a steady economic forecast.

The lowest investment grade rating is “BBB-.”

With a stable outlook, India has the lowest investment grade rating among the three major rating agencies: Fitch, S&P, and Moody’s. Investors use the ratings as a gauge of the nation’s creditworthiness and effect on borrowing rates.

RBI Pays The Government A Dividend

The national government will receive the largest-ever dividend payment of Rs 2.11 lakh crore from the Reserve Bank on Wednesday for the fiscal year 2023–2024.

For the fiscal year 2022-2023, the RBI sent a dividend of Rs 87,416 crore to the Center. In 2018-19, the previous peak was Rs 1.76 lakh crore.

The Reserve Bank of India’s 608th meeting of the Central Board of Directors, presided over by Governor Shaktikanta Das, decided how much dividends to pay out.

For the current fiscal year, the federal government wants to keep the fiscal deficit, or the difference between income and expenditures, at Rs 17.34 lakh crore, or 5.1% of GDP.

The government forecasted dividend revenue from the RBI and public sector financial institutions of Rs 1.02 lakh crore in the Budget for 2024–2025.

The RBI board also discussed threats to the growth forecast and the local and international economic environments.

The Board approved the Reserve Bank’s annual report and financial statements for the most recent fiscal year and spoke about how the bank operated in 2023–2024.

In order to support growth and overall economic activity, the Board decided to maintain the Contingent Risk Buffer (CRB) at 5.50 percent of the Reserve Bank’s balance sheet size during the accounting years 2018–19 to 2021–22 due to the prevailing macroeconomic conditions and the COVID-19 pandemic.

As a result of the economy’s recovery in FY 2022–2023, the CRB was raised to 6.0 percent. The Board has decided to raise the CRB to 6.50% for FY 2023–2024 since the economy is still strong and resilient, the central bank said.

The RBI said that the transferable surplus for 2023–24 was determined using the Economic Capital Framework (ECF) that it established in August 2019 in accordance with the expert group led by Bimal Jalan’s recommendations.

The committee’s recommendation was to keep the risk provisioning under the CRB between 6.5 and 5.5% of the balance sheet of the RBI.