ANOTHER MEGA DIVIDEND PAYOUT BY THE RBI

ANOTHER MEGA DIVIDEND PAYOUT BY THE RBI

For the recently completed fiscal year, RBI has declared a surplus distribution of ₹2,86,588 crore to the central government. This is the third successive year in which the RBI dividend to the government has exceeded the ₹2 trillion mark. A quick clarification here. The dividend is paid by the RBI to the government based on the surplus generated for the financial year 2025-26. However, for the government of India, it becomes receipts for the fiscal year 2026-27, which is what is depicted in the chart below.

Data Source: RBI

Here it must be remembered that the RBI is not a business entity, so it does not have a P&L account. However, it does generate a surplus from various activities, which we shall focus on in detail later. As per the Bimal Jalan Committee recommendations, any RBI surplus left after making a statutory transfer to the contingency risk buffer (CRB) must be transferred to the government. As per the Jalan Committee recommendations, the RBI must first transfer between 4.5% to 7.5% of its balance sheet size to the CRB, and the balance must be paid to the government. For the latest year, RBI transferred 6.5% to the CRB.

WHERE DOES THE RBI SURPLUS COME FROM?

The RBI surplus is generated from five broad heads.

Income from foreign currency assets. The forex reserves held in dollars / Euro / GBP / Yen are invested in such currency denominated securities. The interest earned on such securities and the valuation gains on such currencies are a key source of RBI receipts.

The RBI acts as banker and debt manager to the government of India. Any bond issue that is not subscribed by financial institutions devolves on the RBI. Interest earned on these bonds is another key source of receipts for the RBI.

Foreign currency trading is another item of receipts for the RBI. The RBI regularly buys and sells dollars to manage the exchange rate volatility. In recent months, the weakness in the rupee has meant that RBI has made profits on each subsequent sale of dollars.

RBI also earns from its repo operations. It sells and repurchases government securities at a small spread, which becomes income for the RBI. These are part of regular repo and reverse repo transactions undertaken to manage liquidity in the system.

Finally, there is seigniorage, which is the commission earned by the RBI on the coins and notes minted / printed by the RBI on behalf of the government of India. In addition, RBI also earns from rentals and other consultancy services.

Of these five heads of receipts, the first 3 jointly account for about 90-95% of the total receipts of the RBI and in FY25, they were almost equally distributed.

RBI DIVIDEND: TOO MUCH OR TOO LITTLE

In the last 3 financial years, the RBI has paid out an aggregate of ₹7.66 trillion to the government. This has given rise to the criticism that the RBI has been too liberal with payouts. There are 2 reasons for this view. Firstly, there is no global precedent of any central bank paying such a high dividend to the government. Most central banks use surplus funds to strengthen reserves to fight financial crises. Secondly, critics have argued that some of the major sources like currency gains, and forex trading gains are not sustainable. Hence, the government must not get used to such liberal payouts by RBI. This argument has merit!

However, there are also supporters for this payout. Firstly, the payout is based on a formula arrived at by an independent committee headed by former RBI governor, Dr Bimal Jalan. Those conditions are being satisfied by the RBI before distributing the surplus to the government. Secondly, RBI surplus does belong to the government and if such surpluses can be used to tone down the fiscal deficit, there is absolutely no harm in that.

WHAT IS THE ROAD AHEAD?

Can the RBI continue to pay such hefty dividends? That would depend on the surplus that the RBI generates year-after-year. For FY27, the RBI dividend accounts for about 45% of non-tax receipts and around 5.5% of the total budgeted receipts. For FY27, there are apprehensions that the fiscal deficit may stretch to 4.7% to 5.0% of GDP; against the budget target of 4.4%. Under these circumstances, the RBI dividend will really come in handy!