The higher-than-expected dividend of Rs 2.11 trillion from the Reserve Bank of India (RBI) will let the Centre reduce its market borrowings in the current fiscal by over 0.37% of the gross domestic product (GDP) if other budget numbers hold. However, official sources indicated that part of the extra inflows of around Rs 1.3 trillion from the central bank could be used for scaling up the capex budget.

The record surplus transfer by the central bank has positive spin-offs for the economy. It will boost investment demand and ease inflationary pressures further. The unexpected fiscal bonanza will also make more capital available for corporates that are on the cusp of an investment cycle and ease the tight liquidity for banks, thereby accelerating credit flows to consumers.

“The new government will take a call on how to use extra receipts,” a highly-placed source told FE on condition of anonymity. The extra receipts are pegged at Rs 1.21- 1.31 trillion (0.37-0.4% of GDP), given that the interim budget had factored in Rs 80,000-90,000 crore dividend from the RBI for FY25.

Speaking to FE, Finance Secretary TV Somanathan said the positive fiscal impact of the higher dividend compared to the budget estimate for FY25 will be 0.2-0.3% of GDP.

“The government will keep managing its cash to the best extent possible to minimise interest costs,” Somanathan said when asked if the government would further buy back bonds. About Rs 11.9 trillion or one-fourth of the government’s FY25 budget is allocated to services interest cost.

In the interim budget, the government has set a target to bring down the fiscal deficit to 5.1% of GDP in FY25 from 5.8% in the FY24 (Revised Estimate).

The record dividend transfer on Tuesday overshadowed the central bank’s previous highest transfer of Rs 1.76 trillion in 2018-19 (July-June) following the Bimal Jalan committee review of the RBI’s economic capital framework (ECF).

Higher income in FY24 coupled with lower risk provisioing in FY23 boosted the central bank’s balance scheet, allowing it to transfer more than double the amount estimated in the Budget as its FY24 surplus. Still, it kept the peak level of contingency buffer prescribed under regulatory norms.

The RBI gesture also coincides with the Government’s attempt to infuse liquidity through a bond buyback failing again on Tuesday—the third in a row this month — as the central bank rejected most of the bids. The RBI, acting on behalf of the government, accepted bids worth Rs. 5,266 crore at the auction, just 8.7% of the notified amount of Rs 60,000 crore.

The latest dividend from RBI is 143% higher than last year’s (for FY23 paid in FY24) RBI surplus transfer of Rs 87,420 crore and more than double the Rs 1.02 trillion factored into the interim budget for FY25 from RBI and other financial institutions put together. Since public sector banks’ profitability has increased, the dividends from them are expected to be decent this year as well.

“This additional source of non-tax revenue (higher RBI dividend) accounts for around 7% of the central government’s overall revenue receipts… On the revenue front, we continue to believe that the interim budget revenue targets for FY24-25 are a tad conservative, with the government assuming a tax buoyancy lower than the previous year,” Shreya Sodhani, Regional Economist, Barclays wrote.

“The major reason for the all-time high surplus transfer is the substantial increase in interest earnings from the deployment of reserves in developed countries’ securities as their interest rates have gone up due to their monetary policy action to control inflation in the last one year,” the source quoted above said.

With RBI’s reserves going up, its deployment of the funds in the US Fed and other advanced economies’ government bonds and treasury bills, has gone up significantly, the person added. Separately, the valuation losses in its foreign exchange assets which the central bank had reported in the previous years when interest rates had gone down in developed countries, have also been recouped, the person added. “The government can reduce borrowing, or it can increase growth- creating spending,” the person added.

Analysts said the record dividend announced by the RBI will end the period of tight liquidity for banks. Increased government spending, bolstered by the record dividend, will increase funds available to banks, thereby reducing their need for cash. With demand for cash coming down from banks, overnight rates are likely to fall below the repo rate, according to bankers. Overnight rates which are currently hovering between the repo rate (6.50%) to MSF rate (6.75%) are expected to range between the SDF rate (6.25%) and the repo rate (6.5%)

There are indications that the government will likely increase the 50-year interest-free capex loans to states by Rs 20,000 crore to Rs 1.5 trillion in FY25 as against the interim budget estimate of Rs 1.3 trillion. The Centre has budgeted to invest Rs 11 trillion in FY25 compared with FY24 revsied estimate of Rs 9.5 trillion.

“The RBI has declared transferable surplus of Rs 2.11 trillion, much higher than budgeted and this is despite increasing the Contingent Risk Buffer to the higher end of 6.5%. This positive surprise will cushion the government in a big way in maintaining a glide path towards brining the fiscal deficit to 4.5% while continuing to scale-up its capex strategy,” said N R Bhanumurthy, Vice-Chancellor of Bengaluru’s BASE University.

“But this benefit should also be transmitted to the states, especially to the states that are struggling to meet their capex targets,” Bhanumurthy, added.

Increasing the funds available for capex would certainly boost the quality of the fiscal deficit, Icra chief economist Aditi Nayar said. “However, the additional spending may be difficult to be incurred within the 8-odd months left after the Final Budget is presented and approved by Parliament,” Nayar added. The full budget for Fy25 will be presented by the new government in July.

The risk provisioning made from the RBI’s economic capital to cover monetary, fiscal stability, credit and operation risks – these cumulatively form as the Contingent Risk Buffer. As per the current framework, the size of the buffer must be maintained between 5.5% to 6.5% of the RBI’s balance sheet.