India’s central bank, the Reserve Bank of India (RBI), is poised to deliver a significant financial boost to the federal government with an anticipated dividend payment of up to one trillion rupees ($12 billion). This substantial payout is expected to bolster New Delhi’s finances and assist in meeting its budget deficit target, according to economists.

The RBI’s central board of directors is set to convene this week to finalize the dividend amount, which economists estimate will range between 800 billion to one trillion rupees. This prospective payout surpasses last year’s transfer of 874.2 billion rupees and aligns closely with the government’s target of 1.02 trillion rupees, which also includes dividends from state-controlled banks. Should the RBI transfer the full one trillion rupees, it will mark the highest dividend in five years.

The government is keen on this windfall as it aims to achieve its fiscal deficit target of 5.1% of gross domestic product (GDP) for the current financial year. This significant inflow would also enhance revenues for any new administration taking office after the general elections next month, providing greater flexibility for public spending.

Teresa John, an economist with Nirmal Bang Institutional Equities, highlighted the importance of this surplus transfer. “A big surplus transfer will help the government in meeting any shortfall in disinvestment receipts and create room for funding welfare programs after the elections”, John said. She predicts the dividend payout to be around one trillion rupees.

The RBI’s annual payout to the government stems from its surplus earnings, which are derived from investments, valuation changes on its dollar holdings, and the fees it collects from printing currency. The central bank is mandated to maintain a contingency risk buffer between 5.5% and 6.5% of its balance sheet. 

Several factors are expected to contribute to the large surplus transfer this year. These include higher interest income from securities held both abroad and domestically, driven by tighter monetary policies in advanced economies and within India. However, Gaura Sen Gupta, an economist with IDFC First Bank, noted that earnings from foreign exchange transactions might be lower as the RBI sold fewer dollars in the last fiscal year compared to the previous year. Nonetheless, RBI’s foreign exchange reserves increased by $67 billion in the year ending March 2024.

A substantial dividend and high cash surplus could enable the finance ministry to reduce its bond sales, potentially lowering borrowing costs. India plans to borrow a record 14.13 trillion rupees in the financial year ending March 2025, according to the February interim budget. The anticipated bonanza for New Delhi comes just a month before Indian bonds are added to the JPMorgan Chase and Co.’s emerging market index. This inclusion is expected to attract inflows of up to $25 billion, potentially expanding the central bank’s balance sheet in the fiscal year ending March 2025. Such developments may necessitate adjustments to maintain minimum capital levels.

Economists Shreya Sodhani and Amruta Ghare from Barclays Plc. foresee possible revisions in the RBI’s economic capital framework later in the year due to the expanding balance sheet. They project a dividend payout of over a trillion rupees, which could increase if the framework is revised. They also suggest that any reduction in the contingency risk buffer and dilution of revaluation balances could have significant fiscal implications by increasing dividends paid to the government.

This anticipated financial boost from the RBI is critical for the government as it strives to manage its fiscal responsibilities and support economic initiatives. The substantial dividend payment will not only help in achieving the fiscal deficit target but also provide necessary funds for ongoing and future welfare programs. As the RBI prepares to finalize the dividend, the government remains optimistic about the positive impact on its financial health and economic stability.