On the 22nd of May, the Reserve Bank of India (RBI) declared a record dividend of Rs 2.11 lakh crore to the Government of India for fiscal year 2023-24. It was announced at the 608th meeting of the Reserve Bank of India’s Central Board of Directors, held today in Mumbai, chaired by Governor Shaktikanta Das. The RBI’s dividend is the highest in five years. In 2019, the RBI transferred a surplus of Rs 1.76 lakh crore to the Central government.
I was very pleased to attend the @RBI board meeting earlier today and join with other directors to approve this record dividend.
— anand mahindra (@anandmahindra) May 22, 2024
It’s important to note that this record amountwas declared AFTER increasing the ontingency risk buffer to 6.5% from 6%
I would like to compliment… https://t.co/ME7VG7P9Vb
In a press release, the RBI said, “During accounting years 2018-19 to 2021-22, owing to the prevailing macroeconomic
conditions and the onslaught of the Covid-19 pandemic, the Board had decided to maintain the Contingent Risk Buffer (CRB) at 5.50% of the Reserve Bank’s Balance Sheet size to support growth and overall economic activity. With the revival in economic growth in FY 2022-23, the CRB was increased to 6.00%. As the economy remains robust and resilient, the Board has decided to increase the CRB to 6.50% for FY 2023-24. The Board thereafter approved the transfer of ₹2,10,874 crore as surplus to the Central Government for the accounting year 2023-24.”
Notably, an increased dividend payment is probably going to assist the Central government in reaching its goal of 5.1% of GDP for fiscal deficit during the current fiscal year. Additionally, it would probably support tax collections, giving the new government more spending flexibility when it assumes power early next month following the conclusion of the general elections.
“The government has budgeted the FY25 dividend for RBI and PSU banks & financial institutions at Rs 1020bn, vis-a-vis Rs 1044 bn in FY24. In our view, a positive surprise is likely, similar to last year when the initial budget estimate for the overall dividend was only Rs 480 bn,” a Union Bank of India report published earlier this month reads.
How RBI generates surplus and transfers dividend to Central government
Notably, the RBI allocates contingency money every fiscal year. This provision is aimed at addressing unexpected and unforeseen scenarios, such as security value depreciation and risks emerging from systemic issues, monetary or exchange rate policy operations, and the RBI’s special obligations. The contingency risk buffer should be maintained at 5.5-6.5%. The RBI transferred Rs 1.3 lakh crore to its contingency fund in FY23.
Besides the Contingency Funds, the RBI also maintains revaluation accounts. The RBI maintains revaluation accounts to protect its assets (gold, foreign currency, and investments in domestic and international securities) against market fluctuations. These include the Currency and Gold Revaluation Account (CGRA), the Investment Revaluation Account (IRA), and the Foreign Exchange Forward Contracts Valuation Account (FCVA). Upon satiating the risk provisions and other operational expenses from the RBI revenues, the surplus is transferred to the Central government as dividend.
A substantial portion of the surplus is derived from RBI’s operations in financial markets, when it steps in, for example, to buy or sell foreign exchange; Open Market operations, when it endeavours to stop the rupee from appreciating. Moreover, it also generates surplus as income from government securities it holds in addition to returns from its foreign currency assets. The foreign currency assets are investments in the bonds of foreign central banks or some high-rated securities.
RBI also generates profits from deposits with other central banks or the Bank for International Settlement (BI). The RBI purchases these financial assets to offset its fixed liabilities, which include public money and deposits granted to commercial banks on which no interest is paid.
The RBI’s expenditures are mostly for the printing of currency notes and staff, as well as commissions to banks for carrying out transactions on behalf of the government and to primary dealers. Notably, the Reserve Bank of India (RBI)’s net income for fiscal year 2023 was approximately Rs 874 billion.
