RBI halves dividend payout to government to Rs30,659 crore
Mumbai: The Reserve Bank of India (RBI) said on Thursday that it would pay Rs30,659 crore as a dividend to the government, less than half the surplus it transferred the previous year, potentially affecting the government’s fiscal math this financial year.
In the budget for 2017-18, finance minister Arun Jaitley had pegged dividend income from RBI, public sector banks and financial institutions at Rs74,901 crore. With public sector banks still struggling to make profits because of the heavy stressed asset load on their balance sheets, the bulk of this dividend would have been expected from RBI.
Economists said lower returns from the central bank’s foreign asset holdings and the costs of demonetisation—printing new currency notes and managing the increasing liquidity in the banking system—were possible reasons for a fall in RBI’s profits.
A statement on the dividend payout from RBI did not specify the reasons for the decline.
Explaining the rationale, former RBI deputy governor R. Gandhi said that in the past few years, returns had been coming down because of negative interest rates in developed countries. Due to increased liquidity in the system, RBI has been borrowing money and paying interest which has implications on revenue, PTI quoted him as saying.
In August last year, RBI had paid Rs65,876 crore as dividend. Over the past few years, RBI has been transferring the entire surplus generated through its investment activities to the government.
“It was an unusual year because of surge in banking system’s liquidity following demonetisation. The cost of absorbing liquidity, mainly through reverse repo auctions, impacted RBI’s net income. The fall was expected but the extent of the fall could not be guessed earlier because of changing liquidity dynamics in the system,” said Indranil Pan, group chief economist at IDFC Bank Ltd.
After the government invalidated Rs500 and Rs1,000 bank notes on 8 November, there was a surge in bank deposits as people rushed to exchange and deposit these currency notes.
In order to suck out excess liquidity, RBI conducts reverse repurchase (or repo) operations, among other measures. Here, banks are paid interest for the money parked with RBI.
At its peak, surplus liquidity in the banking system had reached nearly Rs8 trillion in early January. To be sure, while the majority of this was because of demonetisation, government spending also added to the surplus. However, since then, it has sharply come down to Rs2.5-Rs3 trillion currently because the central bank deployed various tools, along with reverse repo operations, to absorb surplus liquidity.
A second demonetisation-related impact is the cost of printing new notes—mainly Rs2,000 and new Rs500 currency notes.
The third reason for the reduced surplus is the lower returns on RBI’s foreign assets, such as US government treasury bills. The appreciation of the rupee against the dollar (some 4.5% between July 2016 and June 2017, RBI’s accounting year) also contributed to the fall in the central bank’s income.
A clearer picture will emerge only when the central bank releases its annual report later this month.
The sharp fall in dividend is important because of its potential impact on the central government’s budget deficit.
“There will be some fiscal impact because most banks are not in a position to pay dividend because most of the profit is expected to go for provisioning against stressed assets,” said Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd.
A finance ministry spokesperson did not respond to messages seeking comment.
While the currency reconciliation process is underway, and some economists talk of a special dividend later, RBI governor Urjit Patel has said that there will be no special dividend just because of withdrawing the legal tender status of Rs1,000 and Rs500 currency notes.