The Reserve Bank of India (RBI) announced a dividend payout of £5.71 billion to the government, in line with budget expectations but not enough to make up for revenue shortfalls from other heads. This year’s dividend is not comparable to last year’s surplus transfer of £17.60 billion, which included a one-time transfer of extra reserves in line with the recommendation of the Bimal Jalan-headed committee.
The dividend was declared in the 584th meeting of the RBI’s central board. Besides approving accounts and maintaining a 5.5% contingency risk buffer, the board also discussed setting up of an innovation hub. Before adoption of the Jalan committee recommendations, the buffer had stood at 6.8%. In the Union Budget 2020, the government had provisioned £8.96 billion in dividend from the RBI, state run banks and financial institutions. Of this, the RBI was expected to contribute £6 billion. Nationalised banks will not be declaring any dividend this year as the RBI has barred them from doing so in order to conserve capital to cover defaults arising out of the Covid-19 crisis.
“The overall balance sheet of the central bank had expanded close to 30% in the RBI accounting year. Such rapid expansion would obviously limit the amount of seigniorage surplus to the government. Also, at the current rate, the total capital of the RBI, including reserves is ahead of the 20.8-25.4% recommended by the Jalan committee that the central bank needs to maintain,” said SBI chief economist Soumya Kanti Ghosh.
According to Ghosh, the government cannot look to the central bank to raise funds. “The surprise to the market was the rise in inflation of close to 7%. This is because of the shift in consumption from goods and services to food items. This will make it difficult for the RBI to cut rates. Now it is for the government to take action,” said Ghosh.
Bankers say that RBI’s revenue generation is highest when there is volatility in the financial markets - either bonds or foreign currency. During times of rupee volatility, the RBI ends up selling billions of dollars of foreign currency assets, which generate huge profits because of the weaker rupee. Similarly, when there is volatility in the bond markets, the RBI makes money through its open market operations.
This year, despite the economic crisis, financial markets - including the currency and bond markets - have been stable with the central bank buying dollars. Facing a massive tax shortfall, along with higher spending due to Covid, the government is keen to maximise revenue from other sources, especially when the department of investment and public asset management (Dipam) has failed to garner resources.
