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Introduction

On Wednesday, May 22, 2024, the Central Board of Directors of the Reserve Bank of India (RBI), in its 608th meeting, approved the transfer of ₹2,10,874 crore as surplus to the Central Government for the accounting year 2023-24. This windfall gain for the Central Government is more than double the ₹87,416 crore transferred in 2022-23, marking a 141% increase. This is the highest-ever dividend payout the RBI has announced, a result of surplus income generated from its investments.

Components of the surplus and reasons for increase

The major component of the RBI’s income comes from interest and other income, classified into domestic and foreign sources. There are eight sources of interest income and 13 sources of other income. Expenditure, comprising approximately 15 components, primarily involves the printing of notes. The surplus transfer to the Government is derived from total revenue minus total expenditure and transfer of funds, after accounting for reserve funds and contingency provisions for financial stability and emergencies.

According to an RBI press release, “The transferable surplus for the year (2023-24) has been arrived at on the basis of the Economic Capital Framework (ECF) adopted by the Reserve Bank on August 26, 2019, as per recommendations of the Expert Committee to Review the extant Economic Capital Framework of the Reserve Bank of India (Chairman: Dr. Bimal Jalan).”

The statement further mentioned, “The Committee had recommended that the risk provisioning under the Contingent Risk Buffer (CRB) be maintained within a range of 6.5 to 5.5% of the RBI’s balance sheet.”

This robust dividend amount is a boon, improving the fiscal position of the Central Government. The RBI dividend exceeds both the budgeted ₹1.02 lakh crore (as announced in the Interim Budget for FY 2025) and market expectations of approximately ₹1.1 lakh crore surplus.

Due to higher global interest rates, the Central Bank earned higher income from its foreign exchange holdings and domestic interest income. Additionally, the rise in gold prices and exchange gains from foreign exchange transactions contributed to the balance sheet. However, the significant year-on-year increase in income is mainly due to interest income from foreign securities and exchange gains from foreign exchange transactions.

Avenues to Utilize and Trim Fiscal Deficit

The government has two primary avenues to utilize this dividend: increasing public expenditure and reducing the fiscal deficit. Despite the substantial gain from the RBI dividend, the government may not opt for an increase in public expenditure, especially populist spending. The final pre-election budget already includes a significant increase in infrastructure expenditure of ₹11.11 lakh crore, three times the amount spent in 2019.

Using this surplus dividend to reduce the fiscal deficit would have long-term benefits. Economists and analysts suggest that this mega dividend income may reduce the fiscal deficit by around 0.2 to 0.4% of GDP for FY 25. The Interim Budget has already set an ambitious target to bring down the fiscal deficit from 5.8% of GDP in FY 24 to 5.1% of GDP in FY 25.

Bond Yields 

Following the RBI’s announcement of the surplus transfer, bond yields fell. The 10-year benchmark bond yield dropped to a two-month low of 7.037% on May 22. The 10-year bond yield largely depends on the government’s decision to reduce borrowing or increase capital expen- diture. Lower government borrowing would soften the yield, providing relief in the bond market. Dealers and experts expect bond yields, particularly the 10-year benchmark bonds, to trade in the range of 7% to 7.05% in the near term.

Conclusion

This substantial surplus will help India achieve fiscal consolidation more easily. The windfall gain could help reduce the fiscal deficit to 4.5% in FY 26. From every economic perspective, this windfall gain is beneficial for the Government and the economy. However, this can only happen if the Government of India utilizes this amount to reduce the fiscal deficit.