RBI's ₹2.68 Lakh Crore Dividend Bonanza Beats Govt Estimate
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The central bank Friday declared a record surplus transfer of ₹2.68 lakh crore for FY25 to the Centre —exceeding North Block's budget estimates of dividend receipts for this fiscal and beating the FY24 payout by nearly a third—and reworked the balance sheet-referenced distribution formula to make future payments more predictable.The economic capital framework (ECF), which is the theoretical bedrock determining the payout range for a financial year, has been tweaked so as to ringfence the Reserve Bank of India's (RBI) finances in times of financial crises.On Friday, the RBI Board raised the upper band of the Contingent Risk Buffer (CRB), now to be maintained within a significantly wider range of 7.5% to 4.5% of the central bank's balance sheet.The band previously ranged from 6.5% to 5.5%.'This revised CRB range gives the RBI more room for future dividends,' said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership. 'With this payout, it is possible for the fiscal deficit to be lower by 10-20 basis points.'Fiscal deficit for the current year is budgeted at 4.4% of GDP.The dividend transfer to the government, based on the Bimal Jalan committee recommendations, has 'stood the test of time', and only some tweaking was required for the coming five years, said people familiar with the matter.They said at a time when the economy is seeing a steady, consistent growth rate, some alteration in dividend transfer formula may be required to suggest what the math should be for the next five years."The Bimal Jalan panel recommendations have stood the test of time, even during Covid... I don't see the panel formulations coming to such an end. Some kind of alterations will happen and RBI is working on it, maybe some tweaking (of the panel recommendations)...," said one of the persons.The ECF was adopted in August 2019 based on the Jalan-led Expert Committee report.The announced fund transfer of ₹2.68 lakh crore is 27% higher than the ₹2.1 lakh crore paid to the government by its money manager last year. The budget, in February, had estimated receipts of ₹2.56 lakh crore as dividend income from the RBI and other government financial institutions.If the CRB was retained at 6.5%, as in the previous year, the surplus fund transfer could be ₹3.5 lakh crore.The RBI's surplus transfer has become a key component in the government's management of fiscal balance. As the central bank's balance sheet and operations have been expanding, the transfers have also been increasing. Worried about a likely deterioration of the central bank's finances, a committee under former Governor Bimal Jalan was set up to prescribe a framework that was reviewed internally by the RBI recently. It has suggested new norms, including the widening of the contingency reserve buffer.'The extant ECF had met its objective of ensuring a resilient balance sheet for RBI, while maintaining a healthy transfer of surplus to the government,'' the RBI said in a statement Friday. 'Certain changes have, however, been made with the objective of further strengthening the framework to align better with any emerging risks.'The central bank said the changes to the framework Friday allow better risk management, especially in an uncertain trade environment globally.'The revised ECF provides requisite flexibility in the maintenance of risk buffers, considering the prevailing macroeconomic and other factors, while also ensuring needed intertemporal smoothing of the surplus transfer to the government,'' the RBI said.The revised framework using a much wider reference frame allows flexibility and is more practical, experts said.'The decision to widen the Contingency Risk Buffer band to 4.5-7.5% of the balance sheet from 5.5-6.5% previously is pragmatic,'' said Anubhuti Sahay, head of India economic research, Standard Chartered Bank. 'It provides the RBI with the required flexibility to manage potential volatility in income generation and the objective of financial stability and allows for better predictability on dividend transfer to the government and thus fiscal deficit planning.'The Jalan committee recommended a capital framework that served well for the RBI as well as the government as it ended a controversy over how much surplus the central bank could keep with itself. Former Chief Economic Advisor Arvind Subramaniam first raised the issue years ago when the government was facing a tough fiscal situation that led to disputes with the RBI.The revised framework also includes factoring in the market risks associated with the off-balance items of the central bank into the capital framework, it said.Earnings of the central bank also do not remain the same as its positions in the market determine whether its trades in the money and forex markets turn profitable. After Covid, many central banks have slipped into losses, and some of them have skipped transferring any surplus to their governments because of lack of any gains.'The same kind of revenue may not always be expected in the future and hence cannot be called a new normal as forex sales may not be as large as this year,'' said Madan Sabnavis, economist, Bank of Baroda. 'But, on the other hand, if buffers are lowered when conditions are normal, then there could be earnings from this side.'
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