MC Explains| Will RBI surprise the bond market with another large dividend transfer?

Reserve Bank of India

Expectations of a higher dividend transfer by the Reserve Bank of India (RBI) to the government are again surfacing, in light of the dollar sale by the central bank in recent months, as well as the higher-than-expected dividend released last fiscal.

The central bank every year, after provisioning for bad or doubtful debt, depreciation of assets, contributions to staff and superannuation fund, and other matters, transfers the remaining surplus to the government, as required under the RBI Act.

The surplus transfer or dividend for this year is being keenly anticipated, as RBI has heavily sold dollars in the market, leading to expectation of increased income.

To understand how RBI earns, and why it transfers surplus to government, continue reading this explainer.

Firstly, why does the RBI transfer surplus income to government, and is it mandatory?

Every company, including banks have a commitment to shareholders to share their surplus or net profit earned in a year, which is called dividend. The Reserve Bank of India, while not a commercial organization is not any different, and needs to pay back the government, and therefore, has to transfer excess funds after adjusting all provisions stated under the RBI Act.

What is the legal basis of RBI’s surplus transfer?

As per Section 47 of the RBI Act, after making provision for bad or doubtful debt, depreciation in assets, contributions to staff and superannuation fund and other matters for which provision is to be made, the balance of the profit shall be paid to the Central Government.

Typically, RBI’s central board approves this transfer in May every year, one month after the closure of previous financial year.

Why is there speculation around a sizeable dividend payout for FY25?

RBI has been a net seller of US dollar since ​September 2024, and has has been doing so to defend Rupee from falling sharply against the greenback. This strategy has helped INR stay the least-volatile among Asian and global peers.

According to RBI’s data, the central bank has sold $195.568 billion between April and November 2024, and INR during this period has been in range of 84-86 against the dollar.

Such heightened selling of dollars may have increased the revenue for the central bank. The logic is simple, like in any commercial transaction, the RBI has accumulated US dollars cheap and sold it when the price has risen. The central bank accumulated dollars at lower exchange rate in the range of 82-83 per USD, and is selling at much higher rate in the range of 84-86/USD.

Is a falling Indian Rupee good for government?

As per RBI data, the range of Indian rupee between April and September - when RBI accumulated dollars - was in the range of 82-83/USD. However, when the RBI started selling, the level of Indian rupee was in the range of 84-86 against the US dollar.

This has sparked speculation of another year of bumper dividend payout from the RBI to the Centre. RBI's Central Board of Directors had approved the transfer of Rs 2.11 lakh crore as surplus to the government for the financial year 2023-24.

With two more months to go for the fiscal year to end, even if INR is to stabilise at 86.60 level, it could still leaves RBI with a copious surplus.