RBI's high dividend to ease pressure on upcoming budget

Experts feel that bumper Reserve Bank of India’s (RBI’s) dividend to Centre will help make the forthcoming Budget easy.

Talking to Bizz Buzz, Anil Kumar Bhansali, Head of Treasury and Executive Director at Finrex Treasury Advisors, said, “What I would like to emphasise here is that RBI could manage the huge dividend and increase in buffers not only because of making profit on forex but also an increase in yields on investment held in US securities amounting to about $126 billion from 0.25 per cent to 5.25 per cent for full year.”

He added that the RBI also benefited from higher yields on government borrowing, which increased by about 2 per cent, from 5.25 to 7.25 per cent.

Also the gold revaluation must have brought sufficient extra margin/profit. Of late, a noted economist and columnist, Swaminathan Aiyar opened a Pandora’s Box by wondering how RBI managed to give Rs 2.1 lakh crore dividend to government. He said that it will make a huge difference to the July Budget.

He went on to say that the Finance Minister Nirmala Sitharaman wanted to go from 5.8 per cent to 4.5 per cent fiscal deficit in next couple of years. It is being brought about not on the revenue side, but by getting the non-revenue RBI transfer, which will make it much easier to get down to 5.1 per cent this year. The target for the consequent year would be 4.5 per cent.

The Finance Minister may be on the glide path on the fiscal deficit with a bumper dividend like this, but this is non-revenue and that means the revenue deficit continues to be very substantial, even if she reaches the fiscal deficit target. This will not be repeatable in subsequent years. But this non-revenue RBI transfer has made a very big difference to the full budget, which is going to be presented in July.

Another analyst, requesting anonymity said that there is nothing called non-revenue. It is a mistake. There are two types of revenues: tax revenues and non-tax revenues.

Dividends like the RBI dividend, sales proceeds of public sector stakes are all non-tax revenues. Irrespective of from where the money comes, it eases the government finances. Money has no color, he said.

Budget is a statement of estimated government expenditure and revenues. Irrespective of whether the Fed cuts rates or not, the RBI will cut rates the moment inflation slows down. Exchange rates are determined more by asset movements and less by interest rate parity.

According to Dr Soumya Kanti Ghosh, Chief Economic Advisor of SBI, “There is a large probability of RBI dividend being healthy in FY25 as well and may even be closer to Rs 2.1 trillion. It may be noted that a rate cut by Fed towards September could fuel a rally in currency against the dollar.”