India’s central bank, the Reserve Bank of India (RBI), is poised to make a significant payout to the government, thanks to its intervention in currency markets to stabilize the rupee. Economists estimate that this payout could be around 2 trillion rupees ($23.1 billion), with some projections placing it slightly lower, at 1.5 trillion rupees, for the fiscal year ending in March.
This payout forms part of the RBI’s annual surplus transfer to the government. The central bank generates this surplus through investments, the valuation of its dollar holdings, and fees from printing currency. While a portion of the surplus is retained to strengthen the RBI’s capital base, a large chunk is transferred to the government, which relies on these funds for its budget.
A Crucial Financial Lifeline Amid Economic Challenges
This substantial windfall comes at a critical time for the Indian government, which is working to revive an economy that’s been hampered by weak consumption, sluggish private-sector investments, and moderating tax revenues. Aastha Gudwani, an economist at Barclays, notes that the RBI’s payout will help offset the government’s shortfall in corporate tax revenues and divestment proceeds. Analysts from Standard Chartered also expect the reliance on the RBI’s surplus transfer to remain high, potentially representing 0.5%-0.55% of India’s GDP, above the usual 0.1%-0.4%.
RBI’s Dollar Sales Boost Dividend Potential
The RBI has been selling foreign exchange throughout the year to support the rupee. Between April and November, the RBI sold $196 billion worth of dollars, a sharp increase from $113 billion in the same period the previous year. This total could rise to $250 billion by the end of the fiscal year. These dollar sales are profitable for the RBI because they were bought at a lower exchange rate, allowing the central bank to generate income from the sales.
Experts predict that the RBI’s income from foreign exchange transactions will keep the dividend payout elevated. ICICI Bank’s economists expect the payout to be around 2 trillion rupees, largely supported by increased forex-related earnings in the second half of FY25.
RBI Reserves: From Record Highs to a Necessary Dip
Under former RBI Governor Shaktikanta Das, the central bank built a record foreign exchange reserve pool of $705 billion in September. However, this stockpile has since decreased to $626 billion as the RBI sold dollars to curb the rupee’s volatility. This decline coincides with the rise of the US dollar, particularly following the 2020 US elections, which triggered market turbulence and further weakened other global currencies, including the rupee.
Surplus Transfers Remain a Key Fiscal Strategy
“The RBI may choose to transfer a higher amount to reserves for contingency provisions, which would reduce the dividends available,” wrote Nomura Holdings Inc. economists led by Sonal Varma in a note last week. “Overall, we do not expect any major adverse impact on the RBI’s dividend transfer to the government, though the quantum should be lower.”
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