RBI likely to transfer ₹1 trillion to government in FY25

The Reserve Bank of India (RBI) is likely to transfer approximately Rs 1000 billion to the government IN FY25 according to a report by Union Bank of India.

The report highlights that RBI is anticipated to maintain a robust dividend payout for the fiscal year 2025 (FY25). This projection represents a slight increase from Rs 874 billion transferred in the previous fiscal year.

"The government has budgeted the FY25 dividend for RBI and PSU banks & financial institutions at INR 1020bn, vis-a-vis INR 1044bn in FY24. In our view, a positive surprise is likely, similar to last year when initial budget estimate for overall dividend was only INR 480bn" said the report.

Analysts in the report predict a potential positive surprise, akin to the previous fiscal year, when the initial budget estimate for dividends was significantly lower at INR 480 billion. Despite several factors influencing RBI's dividend calculation, such as interest earnings and foreign exchange (FX) gains, analysts predict a continuation of strong dividend figures.

The majority of RBI's balance sheet, approximately 70 percent, consists of foreign currency assets, with another 20 per cent in domestic government bonds. Interest earnings from these securities are expected to range from Rs 1.5-1.7 trillion.

Additionally, interest from liquidity operations has increased RBI's earnings, particularly as the banking system returned to a deficit mode from September 2023.

While income gains of RBI from FX (Forex) sales decreased slightly due to lower sales volumes, they are expected to remain substantial despite a rise in the weighted average cost of reserves.

Moreover, a decline in provisions likely contributed to boosting RBI's dividend. Provisions for reserves, as per the Economic Capital Framework outlined by the Jalan committee, saw a rise in the contingency fund provision due to increased balance sheet growth.

The impact of the RBI dividend announcement on markets may be limited in the near term, especially with ongoing elections potentially delaying government spending.

However, if the surplus balance is utilized for activities like G-Sec buybacks, it could support the shorter end of the G-Sec curve. Overall, analysts maintain a positive outlook on longer-duration G-Secs due to favorable demand-supply dynamics.

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