Record RBI dividend may help govt meet FY25 fiscal deficit target, say Fitch Ratings

Sustained fiscal deficit reduction positive for India's ratings, says Fitch

The higher-than-expected dividend announced by the Reserve Bank of India (RBI) will likely help the government to meet the 5.1 percent fiscal deficit target it has set for the fiscal year 2024-25, Fitch Rating has said.

The record surplus transfer of Rs 2.11 lakh crore for FY24 could also be used to narrow the deficit beyond the target, the ratings agency said in a report on May 27.

“Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term,” the rating agency said.

On May 22, the RBI’s Central Board of Directors approved transfer of Rs 2.11 lakh crore as surplus to the government for FY24.

The dividend, though for 2024-25, would be reflected in the government’s account for FY25.

The new government, which will be formed after June 4 when votes would be counted, is likely to be present the budget in July and that would determine how the dividend is used, the report said.

Presenting the interim budget in February, finance minister Nirmala Sitharaman said the government was targeting a fiscal deficit of 5.1 percent of the GDP for 2024-25.

The record dividend is 0.6 percent of GDP in FY24. It is above 0.3 percent of FY25 GDP, as expected in the interim budget, and would help the authorities in meeting near-term deficit reduction goals, the report said.

“An important driver of higher RBI profits appears to be higher interest revenue on foreign assets, though the central bank has not yet provided a detailed breakdown,” the report said.

In its full-year budget, the new government would have two alternatives. The government can opt to keep the current deficit target for FY25, and the windfall would allow it to further boost spending on infrastructure, or to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment, the report said.

Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1 percent of the GDP. The government’s choice would give greater clarity around its medium-term fiscal priorities, Fitch said.