RBI’s Rs 2.11 lakh dividend provides near-term support to fiscal performance: Fitch Ratings

The all-time high dividend of Rs 2.11 lakh by the Reserve Bank of India will help the government maintain the fiscal deficit target at 5.1 per cent for the year 2024-25. Fitch Ratings says higher dividend by RBI could push FDs even lower than target.

“The higher-than-expected dividend by the Reserve Bank of India (RBI) will help the government ensure that the 5.1% GDP deficit target for the financial year ending March 2025 (FY25) is met and the deficit is brought down. It can be used to. Beyond current target.” Fitch Ratings says

How the government plans to use the dividends paid by the central bank will be announced in the new government budget in July.

Finance Minister Nirmala Sitharaman has indicated that the government aims to limit FDs to 4.5 percent of GDP by FY 2026.

“Sustained deficit reduction, especially if underpinned by sustainable revenue-enhancing reforms, would be positive for the fundamentals of India’s sovereign rating over the medium term,” Fitch Ratings says.

RBI’s record-high dividend of Rs 2.11 lakh crore, equivalent to 0.6 per cent of GDP, from its operations in FY2024. This is more than double the 0.3 percent of GDP expected in the interim budget for FY2015. The dividend will help the new government meet its near-term deficit reduction targets.

An important driver of RBI’s higher profits appears to be higher interest revenues on foreign assets, says Fitch, although the central bank has not yet provided details.

The new government will have two options in the post-election budget. First, the government may choose to keep the current deficit target for FY20 at 5.1 per cent, and use the windfall from the RBI to further boost spending on infrastructure, or make up for unexpected spending or lower-than-budget revenues. To compensate for this, for example, disinvestment. Alternatively, all or part of the dividend could be saved and used to bring the deficit below 5.1 percent of GDP. The July Budget will give more clarity on its medium-term fiscal priorities.

Dividend transfers from the RBI to the government may be significant at the margin of fiscal performance, but this depends on various factors, including the size and performance of the assets held on the central bank’s balance sheet and India’s exchange rate. Transfers may also be influenced by the RBI’s views on what level of buffer is appropriate to maintain on its own balance sheet.

Fitch Ratings believes that the potential volatility of transfers means there is significant uncertainty about their medium-term path, and we do not anticipate that dividends as a share of GDP will be sustained at such high levels.