RBI's Potential Record Dividend: Fiscal Relief or Long-Term Risk?

While the RBI’s dividend provides short-term relief, it risks long-term trade-offs, potentially undermining financial stability and currency management as fiscal support takes precedence over core objectives.

Dhananjay Sinha

rbi s potential record dividend fiscal relief or long term risk

Reserve Bank of India. Photo: CC BY-SA 2.5, via Wikimedia Commons

Speculation is mounting that the Reserve Bank of India (RBI) may transfer a record-breaking dividend to the government of India in its upcoming FY25 annual report.

Market estimates suggest a payout of Rs 3-4 trillion, far exceeding the imputed FY26 budget estimate of Rs 2.2 trillion. Notably, this would more than double the incremental reserve money (Rs 1.5 trillion) printed by the RBI in FY25 to support the economy.

This expectation has fuelled optimism for fiscal consolidation, influencing financial markets. The government bond (G-sec) yields have undergone a bull flattening, declining to 6.22% from 6.8% three months ago, reflecting market anticipation of reduced borrowing needs and potential RBI rate easing. Additionally, banking system liquidity has turned surplus due to a declining credit-deposit ratio and the lagged impact of RBI’s Q4 FY25 liquidity infusion measures to balance foreign exchange (FX) interventions.

Softening risk-free yields and the anticipated large RBI dividend have bolstered equity markets, aligning with easing global trade tensions following the US-China tariff truce. However, the Union government's fiscal situation remains strained, marked by a slowdown in net tax revenue after an anomalous 41% surge in Q1 FY25, driven by lower tax refunds and a spike in income tax collection.

Post-Q1, net tax growth slowed to 3.6% year-over-year (July 2024-February 2025), constraining government spending, particularly capital expenditure, which declined as the Union government prioritised fiscal targets. Total spending averaged 3.9% from April 2024 to February 2025, reflecting fiscal drag despite last year’s high RBI dividend of Rs 2.1 trillion, which exceeded the budgeted Rs 1.1 trillion.

The anticipated FY25 dividend is critical for FY26 fiscal planning, especially amid challenges from global protectionism and economic slowdown. Analysis of RBI’s financials reveals shifting dynamics. Interest income, the RBI’s core revenue, is projected to decline to Rs 1.7 trillion in FY25 from Rs 1.9 trillion in FY24, driven by lower global and domestic interest rates (e.g., US Federal Reserve rate cuts and softening Indian yields) and a reduced share of foreign currency assets due to RBI’s FX interventions.

However, provisioning for the Contingency Fund (CF) is expected to quadruple to Rs 1.6 trillion from Rs 428 billion in FY24, driven by increased currency market volatility and adherence to the Jalan Committee’s recommendation of maintaining aggregate Risk Provisions at 6.5% of total assets. In contrast, FY24’s higher dividend was enabled by a 67% cut in CF provisioning to Rs 428 billion and a modest rise in interest income from Rs 1.3 trillion to Rs 1.41 trillion.

For FY25, with interest income (Rs 1.72 trillion) nearly offset by CF provisioning (Rs 1.63 trillion), the estimated Rs 2.25 to 2.5 trillion dividend is likely funded by trading profits from RBI’s aggressive FX interventions. In FY25, the RBI is estimated to have sold US $ 396 billion (including US $ 25 billion in March 2025) and bought US $ 354 billion, resulting in a total trade of US $ 740 billion – 131% of its US $ 565 billion foreign currency reserves. This compares to US $ 332 billion (58% of reserves) in FY24. Trading income is projected at Rs 2.25-2.5 trillion (4.6–5.1% of foreign currency assets), the highest in over a decade, up from 2.5% in FY24 and 1% in FY19. These profits stem from the difference between the historical average buy price of Rs/US $ and the current rate in a depreciating rupee environment.

The rising contribution of trading income to RBI’s surplus, alongside lower risk provisions relative to total assets, reflects the Jalan Committee’s post-2019 shift to a balance sheet ratio-based provisioning approach (5.5-6.5% of assets verses 9% in FY14). This has enabled aggressive trading to boost profits and support the Union government’s fiscal needs.

However, the RBI’s growing role in fiscal support raises concerns about its core mandates of price stability, financial stability, and exchange rate management. Aggressive FX interventions to generate trading profits may distort the rupee’s market value, risking fiscal repression. High FX reserve churn could strain the RBI’s capacity to sustain such profits if book values adjust to recent exchange rates or if global volatility, such as from trade fragmentation, necessitates higher risk provisioning.

The Union government’s reliance on RBI dividends reflects a tightening fiscal scenario, exacerbated by rising public debt (Rs 196 trillion for Union government, Rs 94 trillion for states) and slowing tax buoyancy due to weaker productive sectors. Reduced spending in FY25, with contracting capital expenditure, has dragged growth, and continued fiscal consolidation in FY26 could intensify these challenges. While the RBI’s dividend provides short-term relief, it risks long-term trade-offs, potentially undermining financial stability and currency management as fiscal support takes precedence over core objectives.

Dhananjay Sinha is a CEO and co-head of institutional equities at Systematix Group.

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