How RBI Generated A Record Dividend – Lower Provisions And Higher Interest On Foreign Bonds, Deposit

The figure was stunningly high—more than double the budgeted amount of Rs 1.02 lakh crore as dividends from the central bank and public sector banks and the revised estimate of Rs 1.04 lakh crore for 2023-24.

The unexpectedly large dividend gives Finance Minister Nirmala Sitharaman, or her successor, roughly 0.4 per cent of the GDP of fiscal room. The minister can either choose to cut the fiscal deficit by an additional 40 basis points in 2024-25 to 4.7 per cent—all other things held constant—or spread out some or all of the extra income to some expenditure heads. 

It is a problem of plenty the government doesn’t always have.

But while the mandarins of North Block consider what to do with the thousands of crores they have found under the proverbial sofa, the RBI’s annual report for 2023-24, released on May 30, has shown where the extra dividend came from.

Income Boosts

In 2023-24, the RBI’s total income grew by 17 per cent to Rs 2.76 lakh crore, aided primarily by a jump in interest income from its foreign assets.

Like any investor, the RBI allocates its assets across different classes. When it comes to its foreign exchange reserves, the central bank focuses on investing in bonds of foreign governments and deposits abroad, among other things. Some of these generate a return in the form of interest income, while others serve other purposes.

When it comes to foreign deposits, the interest income they generated in 2023-24 was Rs 36,621 crore – more than double of what was earned in 2022-23. Interest income from the RBI’s holding of foreign securities also increased, albeit not at the same pace, to Rs 65,328 crore, up 50 per cent year-on-year.

The rise in interest income from abroad has been thanks to global interest rates remaining high. Consider the US, where the RBI holds a substantial portion of its foreign currency assets through US government bonds. In 2023-24, the US Federal Reserve raised its federal funds rate target range by 25 basis points to 5.25-5.5 per cent, with interest rates rising across the board. Yield on the 10-year US Treasury rose 72 basis points in 2023-24 to end the year at 4.2 per cent.

These two higher sources of income more than nullified the marginally lower interest the RBI earned from its holdings of rupee securities (down 4 per cent at Rs 92,590 crore) and the smaller gain the central bank made from its foreign exchange transactions.

The RBI earns a pure profit when it sells foreign currency to reduce undue volatility in the rupee’s exchange rate. In 2023-24, the gain declined to Rs 83,616 crore from Rs 1.03 lakh crore the previous year.

Reduced Provisions

While the income boost came from various subheads, the RBI’s expenditure more than halved last year to Rs 64,694 crore primarily due to lower risk provisioning.

In 2022-23, the central bank had to set aside a massive Rs 1.31 lakh crore as provisions. This reduced to Rs 42,820 crore in 2023-24, with the balances in the RBI’s key revaluation accounts – Currency and Gold Revaluation Account, Investment Revaluation Account-Foreign Securities, and Investment Revaluation Account-Rupee Securities – showing an improvement last year.

The total size of the RBI’s Contingency Fund was at Rs 4.29 lakh crore as on March 31, 2024. 

The RBI’s Contingency Fund is to meet unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary and exchange rate policy operations, and systemic risks.

The RBI’s provisions constitute the biggest chunk of its expenditure; anytime they fall, the effect on the dividend transferred to the government is quite remarkable. Similarly, when provisions rise – as they did in 2021-22 – the fall in the RBI’s dividend is stark.

An Even Higher Dividend?

Interestingly, the dividend to the government for 2023-24 could have been even larger had the central bank’s board not decided to increase the Contingent Risk Buffer to 6.5 per cent of the RBI’s balance sheet.

As per the Bimal Jalan-led committee on the RBI’s Economic Capital Framework, the central bank must maintain a Contingent Risk Buffer in the range of 5.5-6.5 per cent of its balance sheet. As such, every time the balance sheet expands, some provisions must be made.

With the Indian economy displaying robust growth, the RBI’s board has now decided to maintain a risk buffer at the upper end of the range recommended by the Jalan committee. This follows a similar increase of 50 basis points last year.

If the Contingent Risk Buffer had been maintained at 6 per cent for 2023-24, the dividend to the government would have been higher by Rs 35,239 crore, or Rs 2.46 lakh crore in total!

The size of the RBI’s balance sheet increased by 11 per cent in 2023-24.

What About Next Year?

Predicting how much dividend the RBI will transfer to the government is a tough proposition. Even making educated guesses is difficult.

Consider the following: the RBI’s interest income from foreign sources should decline in 2024-25, given that the US Federal Reserve is expected to (finally!) start cutting interest rates later this year. According to CME’s FedWatch Tool, the prices of 30-Day Fed Funds futures suggest there is a 34 per cent probability of the fed funds rate target range being 50 basis points lower at 4.75-5 per cent by March 2025.

At the same time, the RBI’s foreign exchange reserves will likely increase over the course of 2024-25 thanks to foreign inflows from the inclusion of Indian government bonds on global indices. This foreign money will have to be deployed somewhere. Wherever that may be, it will generate a certain amount of return, adding to the RBI’s coffers.

Siddharth Upasani is a Delhi-based journalist with more than 10 years of experience covering the Indian economy, economic data, and monetary and fiscal policies.