RBI approves record Rs 2.11 lakh crore surplus dividend transfer to government

The Reserve Bank of India (RBI) has approved the transfer of an unprecedented Rs 2.11 lakh crore surplus to the government for the financial year 2023-24. This significant transfer, announced on 22 May, marks the highest-ever yearly surplus handed over by India's apex bank.

The RBI stated that the surplus transfer for the fiscal year 2023-24 is determined based on the Economic Capital Framework (ECF) adopted on 26 August 2019, following the recommendations of the Bimal Jalan committee. A notable increase in the central bank's income from forex holdings and other factors contributed to this sharp rise in surplus.

This substantial dividend, to be reflected in the government’s accounts for the fiscal year 2025, exceeds initial government expectations by a considerable margin. Originally, the government had anticipated a transfer between Rs 85,000 crore and Rs 1 lakh crore, but the final figure has far surpassed these projections. Though some view this development as a boon for the Central government, offering a significant boost to its liquidity and expenditure capabilities, others question its effective uitilisation.

About 70 per cent of the RBI’s annual dividend or surplus is regularly transferred to the government of India. The remaining 30 per cent is from a contingency fund the RBI sets aside for any emergency, such as an unforeseen drop in the value of RBI’s investments etc.

Aditi Nayar, chief economist, head of research and outreach at ICRA Ltd, highlighted the implications of this surplus. “The amount of Rs 2.11 trillion is well above the budgeted figure of Rs 1.5 trillion in the Interim Budget for FY2025 under dividends and profits, which includes dividends from PSUs,” she said.

Nayar noted that this unexpected surplus would enhance the government's financial resources for FY2025, potentially allowing for increased expenditures or sharper fiscal consolidation than anticipated. However, she cautioned that the challenge lies in effectively utilising the additional funds within the limited timeframe after the final budget is approved by Parliament.

The RBI’s statement also announced an increase in the contingent risk buffer (CRB) to 6.50 per cent for FY2023-24. This move follows a gradual increase from 5.50 per cent, maintained during 2018-22 to support growth amid adverse macroeconomic conditions and the Covid-19 pandemic. With economic recovery evident in FY 2022-23, the CRB was raised to 6.00 per cent, and the continued robust and resilient economy has justified the further increase to 6.50 per cent.

This surplus transfer and the CRB adjustment were approved during the 608th meeting of the RBI's central board of directors, reflecting a cautious yet optimistic outlook on India's economic trajectory. The government had budgeted a dividend of Rs 1.02 lakh crore for FY2025, 2.3 per cent lower than the revised estimate of Rs 1.04 lakh crore for FY2023-24.

This development raises several questions about the future economic strategies of both the RBI and the government. How will the government effectively allocate this surplus to maximise economic growth?

Can the increased CRB buffer provide adequate safeguards against potential economic downturns? As these questions loom, the substantial surplus transfer on 22 May 2024 makes for an interesting moment as India’s fiscal policy plays out.