The Reserve Bank of India (RBI) is expected to transfer a significant dividend to the government, ranging from Rs 2.25 lakh crore to Rs 2.75 lakh crore. This payout will inject fresh liquidity into the banking system, raising surplus funds to between Rs 5.5 lakh crore and Rs 6 lakh crore. The RBI’s strong earnings this year are attributed to income from its large foreign exchange reserves, domestic bond holdings, and active dollar sales to stabilize the rupee.
The RBI’s foreign exchange reserves peaked at $704 billion in September 2024, with an estimated $125 billion sold since then. The gross dollar sales reached $371.6 billion in FY25, up from $153 billion the previous year. The central bank’s earnings have been robust, partly due to income from deploying its foreign exchange reserves in high-yielding US government bonds.
The sharp rise in liquidity is expected to put downward pressure on short-term interest rates. Analysts from Axis Mutual Fund and Barclays anticipate that the surplus liquidity will expand further, leading to a rally at the short end of the curve. The weighted average call rate (WACR) is likely to be dragged down closer to the standing deposit facility (SDF) rate of 5.75%, effectively easing monetary policy.
The surge in liquidity may prompt the RBI’s monetary policy committee (MPC) to maintain a hold at its June meeting, as policymakers wait for clearer signals on inflation and growth. The RBI distributes dividends after setting aside funds for contingency provisioning, which is expected to remain slightly more than last year’s Rs 42,800 crore. The dividend amount is determined under the Economic Capital Framework, which stipulates a risk buffer of 5.5% to 6.5% of the RBI’s balance sheet.
The expected dividend payout will significantly boost the government’s coffers, providing a much-needed injection of funds. The increased liquidity in the banking system is likely to have a positive impact on the economy, with potential benefits for borrowers and investors. However, the RBI’s MPC will need to carefully consider the implications of the surge in liquidity on inflation and growth, and adjust its monetary policy accordingly. Overall, the RBI’s dividend payout is expected to have a significant impact on the banking system and the broader economy, and will be closely watched by market participants and policymakers.