Higher RBI dividend to help ease fiscal deficit by 0.2-0.4% in FY25, say economists

Reserve Bank of India

The highest ever dividend transfer approved by the board of Reserve Bank of India (RBI) to government for financial year 2023-24 is expected to ease fiscal deficit by 0.2 percent to 0.4 percent in FY25, economists said.

“We expect such a windfall to help fiscal deficit ease by 0.4 percent in FY25,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

Further, Gaura Sen Gupta, Chief Economist of IDFC FIRST Bank said the higher dividend represents additional fiscal revenue of 0.4 percent of GDP.

"Incorporating potential shortfall in disinvestment receipts and more moderate tax collection growth than budgeted, FY25 fiscal deficit could undershoot Budget Estimate by 0.2 percent of GDP," Gupta added.

The RBI’s Central Board of Directors has approved the transfer of Rs 2.11 lakh crores as surplus to the government for the financial year 2023-24, the RBI said in a statement on May 22.

Reacting to the development, Finance Secretary TV Somanathan said, "It’s good news, it’s always good when revenues go up."

The dividend, transferred in 2024-25, is sharply higher than what the government had originally expected. The surplus transfer is for the fiscal year 2023-2024, but will reflect in the government’s account in the fiscal year 2025.

Commenting on how much higher the RBI dividend is, the Finance Secretary told CNBC-TV18, "It will definitely be 0.2 to 0.3 percent higher than what we expected as receipts (0.2-0.3% of Nominal GDP)."

In the interim Union Budget 2024, the government has targeted a fiscal deficit of 5.1 percent of the GDP for 2024-25. In absolute terms, the fiscal deficit for 2024-25 is seen at Rs 16.85 lakh crore, with the number for 2023-24 lowered to Rs 17.35 lakh crore from the budget estimate of Rs 17.87 lakh crore.

"We continue on the path of fiscal consolidation, as announced in my Budget Speech for 2021-22, to reduce fiscal deficit below 4.5 percent by 2025-26," Sitharaman said in her speech in Parliament on February 1.

Higher dividend

Economists are of the view that higher dividend is likely supported by interest income on foreign securities and rupee securities.

IDFC First Bank in a report said RBI’s foreign currency assets rose by 13.8 percent on-year in FY24 (till March 29th), led by FX reserve accumulation. Meanwhile earnings on foreign exchange transactions are expected to be lower with gross dollar sales at $153 billion in FY24 versus $213 billion in FY23.

Bhardwaj said higher interest rates both on domestic and foreign securities, significantly high gross sale of FX along with limited drag from liquidity operations compared to the previous year have probably led to such a whopping dividend.

"Higher dividend is supported by a rise in interest income earned from securities held by the central bank," said Swati Arora, Economist, HDFC Bank.