Windfall gain for Centre as RBI expected to earn substantial profits from foreign-currency trading

The Reserve Bank of India (RBI) is expected to earn substantial profits from foreign-currency trading and lending to local banks, resulting in a windfall gain for the Centre. This will be reflected in the form of annual dividend receipts to be paid by the RBI to the government. According to the Budget, the receipts of ₹48,000 crore in FY23 will come from public sector banks and the RBI.

IDFC First Bank's India economist, Gaura Sengupta, believes that the RBI's dividend is likely to surpass the Budget estimates due to significant dollar sales and lower provisioning requirements. She estimates the dividend could range between ₹70,000 crore and ₹80,000 crore. This better-than-expected dividend will help balance the risks faced by the government's tax revenue collections from slower-than-budgeted nominal GDP growth, The Economic Times reported.

The RBI had transferred a surplus of ₹30,307 crore to the government in FY22. The gains from foreign currency sales and interest on loans to local banks are expected to surpass the mark-to-market losses on bond portfolios, both local and overseas.

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The central bank sold a gross $206 billion during April-February of FY23, up from $96 billion in the previous fiscal. The revised accounting framework of the central bank stipulates that the accounting practice of forex operations be linked to historical costs against the earlier practice of week-to-week costs.

According to Rahul Bajoria, Head of EM Asia (ex China), economics research, Barclays Capital, the RBI sold more than it bought, and the income from selling more than $200 billion could be substantial after adjusting for dollar purchases during the year and other swaps and forward transactions.

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The higher dividend payouts are also attributed to the RBI's lending to banks under various windows, which may earn higher interest income as the benchmark repo rates against which it lends to banks have climbed 2.5 percentage points during the year.

In FY23, the outstanding loans and advances to commercial banks alone amounted to ₹1.65 lakh crore, ₹70,000 crore higher than in the previous year. In addition, there was an additional ₹1.11 lakh crore exposure to other entities, or ₹30,000 crore higher than in the previous year.

The interest income on bond holdings and liquidity adjustment facility (LAF) is not expected to be significantly higher. According to Madan Sabnavis, chief economist, Bank of Baroda, a higher outgo on dividends could also be due to higher interest rates during the year and the RBI being in a reverse repo mode.