The Reserve Bank of India (RBI) has approved a £9.91 billion dividend payout to the government for an accounting period of nine months ended March 31, 2021 (July 2020-March 2021). The amount is more than 73% higher than the entire previous year’s £5.71 billion dividend, despite the period being only nine months due to a change in accounting year to April-March. This is also the highest dividend after the £12.3 billion paid out for FY19 (along with a separate £5.26 billion surplus reserve transferred to the government in that fiscal).
The dividend is also higher than what the government had expected for FY21 in its Budget, which was announced in February this year. The central government had pencilled in £5.35 billion as dividend from the RBI and other public sector banks for FY21 as against a dividend income of £6.18 billion in FY20. The windfall will help the government with the revenue shortfall arising out of lower tax collections due to the lockdown induced by the resurgence of the pandemic in April-May 2021. The RBI said that its central board approved the payout in its 589th meeting held last week through videoconference. It added that the dividend was paid out after ensuring that its contingency risk buffers were at 5.5% of its balance sheet.
“The higher transfer is clearly due to two factors: Higher interest income on holding of securities due to various OMOs (holding of government bills increased by £30 billion approximately) as well as sharp increase in forex reserves of around $95 billion, which would have earned 2-2.25% interest. This would have also absorbed the cost of reverse repo operations, which were high at above £40 billion through the year,” said CARE Ratings chief economist Madan Sabnavis.
Unlike commercial banks, the RBI generates a higher surplus during adverse financial conditions as it has to repeatedly intervene in the money and foreign exchange market. For instance, when the RBI intervenes to defend the rupee, it makes huge profits as it sells at a premium the dollars that it purchased earlier. Similarly, in the money market, the RBI generates a surplus by lending to banks under term repos. The flip side of a higher dividend payout by the RBI is that it leads to creation of money and could limit the headroom for the central bank to infuse further liquidity should inflation rise in future.
