RBI's Larger-Than-Expected Dividend To Centre To Aid Fiscal Deficit Target: Fitch

RBI dividend: The government has indicated its intention to gradually narrow the deficit to 4.5 per cent of GDP by FY26

The Reserve Bank of India's (RBI) substantial dividend to the government is set to bolster the achievement of the 5.1 per cent of GDP deficit target for the fiscal year ending March 2025 (FY25), according to Fitch Ratings. This unexpected dividend could potentially lower the deficit beyond the current target, depending on the upcoming Budget decisions by the new government, which will be formed following the June election results and expected to present its Budget in July.

The government has indicated its intention to gradually narrow the deficit to 4.5 per cent of GDP by FY26. Consistent deficit reduction, especially if supported by robust revenue-raising reforms, would enhance India's sovereign rating fundamentals over the medium term, Fitch noted.

Recently, the RBI announced an unprecedented high dividend transfer to the government, amounting to Rs 2.1 lakh crore, or 0.6 per cent of GDP, from its FY24 operations. This figure significantly exceeds the 0.3 per cent of GDP anticipated in the FY25 Budget presented in February, aiding the government's near-term deficit reduction objectives. The primary driver of this increased RBI profit appears to be higher interest revenue on foreign assets, though detailed breakdowns have not been provided by the central bank.

In the forthcoming Budget, the new government has two options. First, it could maintain the current FY25 deficit target, using the additional funds to enhance infrastructure spending, cover unexpected expenses, or compensate for lower-than-expected revenue from sources such as divestment. Alternatively, the government could save the windfall, reducing the deficit below 5.1 per cent of GDP. This decision will provide clearer insight into the government's medium-term fiscal priorities.

While RBI transfers to the government can significantly impact fiscal performance, they are influenced by several factors, including the central bank’s asset performance and India's exchange rate. These transfers also depend on the RBI’s stance on the appropriate buffer levels for its balance sheet. Given the potential volatility, there is substantial uncertainty about the medium-term trajectory of these transfers, and Fitch does not expect the dividends as a share of GDP to remain at such elevated levels.