The larger-than-expected Reserve Bank of India (RBI) dividend of Rs 2.11 trillion to the Centre should help ensure that the 5.1% aim of fiscal deficit-to-GDP ratio for FY25 is met, and could also be used to lower it further, Fitch Ratings said in a note.

The RBI recently announced a record-high dividend transfer to the government equivalent to 0.6% of GDP from its operations in FY24. This is above the 0.3% of GDP expected in the FY25 budget from February, so will aid the authorities in meeting near-term deficit reduction goals, the note said. An important driver of higher RBI profits appears to be higher interest revenue on foreign assets, though the central bank has not yet provided a detailed breakdown, it said.

The full Bugdet, set to be presented by the new government in July will determine how the surplus will be used. Last week, an official source had told FE that the government may use the extra cash on incurring extra expenditure as well, particularly on scaling up capex.

The Narendra Modi government has set a target of bringing the fiscal deficit to 4.5% as a percentage of GDP by FY26. “Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term,” Fitch Ratings said.

In its post-election budget, the new government has two alternatives. First, the government could opt to keep the current deficit target for FY25, and the windfall could allow the authorities to further boost spending on infrastructure, or to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment, noted Fitch Ratings. 

Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1% of GDP, it said.

Transfers from RBI to the government can be significant at the margin for fiscal performance, but depend on various factors, including the size and performance of assets held on the central bank’s balance sheet and India’s exchange rate, the global ratings agency said. Transfers may also be influenced by the RBI’s views on what level of buffer is appropriate to maintain on its own balance sheet. 

“The potential volatility of transfers means there is significant uncertainty about their medium-term path, and we do not anticipate that dividends as a share of GDP will be sustained at such a high level,” Fitch Ratings said.