RBI’s Dividend May See An Increase In FY24

Reports suggest that the Reserve Bank of India‘s (RBI) yearly earnings are poised to generate a substantial profit windfall for the federal government.

A recent study indicates that these earnings have been bolstered by profitable foreign currency trades and lending activities to the domestic banking sector. The high demand for borrowing from the RBI by commercial banks, following a policy rate hike and subsequent liquidity depletion, has driven significant gains in revenue for the central bank.

In the recently announced Union Budget 2023, the anticipated total dividend payments from public sector banks and the central bank for FY24 were estimated to be Rs 48,000 crore. It was noted that these dividends could potentially outweigh any market-to-market losses incurred on bond portfolios, both domestically and internationally, due to the gains from foreign currency sales and interest earned on loans to local banks.

Moreover, the central bank may reap benefits from foreign exchange transactions, calculated at historical costs, as it had already sold $206 billion between April to February of FY23, a significant increase from $96 billion in the preceding year. The Budget document suggests that the larger allocation for dividends could be attributed to the higher interest rates in the year when the RBI was predominantly in reverse repo mode. In FY22, it is claimed that the RBI earned Rs 1,500 crore from domestic loans and advances, on a portfolio of Rs 1.3 lakh crore.

On February 1, 2023, the Finance Minister presented the Union Budget for FY 23-24, which included an estimated total dividend revenue of Rs 48,000 crore from the RBI and PSU banks. This prudent approach is fitting as the actual dividend collected in FY23 fell significantly short of projections, with RBI and PSU bank dividends amounting to only around 60% of the full-year target. The positive news is that the RBI may declare a substantial dividend for FY24.

It exercised caution by establishing a contingency provision of Rs 115,000 crore in the previous year to account for expected losses on foreign securities held in its reserves. However, with rising global rates, these losses may have been reduced. For FY22, the RBI distributed just over Rs 30,000 crore, and even when combined with dividends from PSU banks, the total amount barely exceeded Rs 40,000 crore or slightly over 60% of the government’s allocated budget of Rs 73,000 crore. In contrast, the budget for FY24 is a modest Rs 48,000 crore, although actual spending may surpass projections.

One possible reason behind the minimal provisioning needs and surge in dollar sales could be a contributing factor. According to experts, the Reserve Bank of India (RBI) is expected to pay out a dividend that will far exceed the government’s initial projections, reaching an impressive Rs 80,000 crore, more than twice the target set by the Union Budget. This development is considered favourable for the government, as the higher-than-expected dividend from the RBI could potentially help alleviate the risks associated with lower-than-anticipated nominal GDP growth in FY24, which could have a negative impact on tax revenue collections.

To illustrate, let’s assume that the revenue generated from foreign currency sales and the interest earned on loans to local banks would surpass the mark-to-market (MTM) losses incurred on bond portfolios, both at home and abroad. Notably, the RBI sold a total of $206 billion in dollars during the first eleven months of the year, a significant increase from the $96 billion sold during the same period last year.

In 2019, a committee led by former governor Bimal Jalan proposed an updated accounting framework for the central bank, which mandates connecting the accounting practice for foreign exchange transactions to historical expenses, as opposed to the previous practice of tracking week-to-week costs. According to historical data, the average cost of buying dollars is believed to be around Rs. 63 per unit, though the RBI’s sale price for dollars was typically Rs.

During FY22, the RBI generated revenue of approximately Rs. 68,990 crore or $96 billion. Considering the dollar purchases made throughout the year, as well as other swap and forward transactions, the profits from selling over $200 billion could potentially be substantial. This could provide ample room for the RBI to increase its dividend payments to the government.

It is not expected that interest income from bond holdings or the liquidity adjustment facility (LAF) will experience a significant increase. However, due to a rise of 2.5 percentage points in the benchmark repo rates over the past year, there may be a possibility of generating more interest revenue by lending to banks through various channels. The amount of loans and advances outstanding to commercial banks stands at Rs 1.65 lakh crore, which is Rs 70,000 crore higher than in the previous fiscal year.

Additionally, the exposure to other firms has risen by Rs 30,000 crore, reaching a total of Rs 1.11 lakh crore compared to the previous year. This may result in a considerable surge in the central bank’s interest revenue from loans and advances. In the financial year 2022, the RBI earned Rs 1,500 crore in interest revenue from domestic loans and advances, on a portfolio worth Rs 1.3 lakh crore.

Rahul Bajoria, Head of EM Asia (excluding China), Economic Research at Barclays Capital, anticipates that the RBI will be able to distribute dividends by leveraging a reduced requirement for adequate capital and the profits generated from forex transactions. The aggregate amount of foreign exchange traded versus total purchased is significant, and the RBI is expected to have the means to pay dividends due to a lower need for capital and profits obtained from forex transactions. According to Madan Sabnavis, the chief economist of the Bank of Baroda, a larger allotment for dividends could also be due to the higher interest rates prevailing throughout the year, during which time the RBI was functioning under a reverse repo mode.

A recent evaluation by Gaura Sengupta, India economist at IDFC First Bank, reveals that the RBI dividend is likely to surpass budget estimates due to elevated levels of revenue in dollars and reduced provisioning requirements. “Our estimation is that the RBI’s dividend could range from Rs. 70,000 to Rs. 80,000 crore. The higher-than-anticipated RBI dividend will help offset some of the risks associated with lower-than-expected tax revenue receipts.” The central bank has already released a surplus of Rs. 30,307 billion to the government centre for FY22.

Proofread & Published by Naveenika Chauhan