Why the RBI declared a hefty dividend — An explainer

The biggest part of the RBI’s income has come from its hefty foreign currency holdings. These are held in the form of US bonds and treasuries, with a bit in the form of Euro, Swiss and Yen bonds. Now the average US Fed funds rate in FY23 was around 2.5%, while in FY24 the average was 5%. So chances are the central bank may have earned at least 2 percentage points more on all its foreign bond holdings in FY24, in comparison with FY23.

What is the invested amount on which RBI earned two percentage points more?

RBI data shows the central bank’s foreign currency reserves rose by $61 billion from $509 billion to $570 billion as of March 31, 2024. In rupee terms, its foreign currency investments rose from a stock of ₹41.9 trillion in March 2023-end to ₹47.2 trillion in FY24-end. Assuming the central bank earned even a 3% average on a bond portfolio of ₹47.2 trillion, its interest earned works to ₹1.42 trillion. Of course, one has to deduct a bit for a fall in bond prices from this.

A second major source of earning is likely to be from the sale of dollars. The RBI gross sold $153 billion in FY24, as per its data. (even though it net bought more because its reserves rose by $61 billion in FU24). Now, when the RBI sells dollars it calculates its purchase price as the average price of all dollars bought historically.

Economists say the historical price is probably around ₹75–76 per dollar. But the sale price would have been at least ₹83/dollar. So effectively, the central bank probably made a profit of ₹8 on every dollar sold. From a sale of $153 billion in FY24, the RBI probably made revenues of ₹1.2 trillion.

The RBI would, however, have lost some revenue on its domestic market operations since it was absorbing money for 259 of the 365 days in FY24, according to SBI economist Soumyokanti Ghosh. But the RBI would have made a packet of ₹0.8-1 trillion on interest earned on its Indian government bond holdings of ₹13.5-14 trillion in FY24. Again, one has to subtract any loss due to a fall in prices.

Net-net the RBI would have, by a conservative estimate, earned a surplus of at least ₹3 trillion to ₹3.5 trillion in FY24. This explains the hefty dividend of ₹2.1 trillion with enough to even boost its contingent risk buffer from 6% to 6.5%.

It remains to be seen how the government uses this manna of ₹2.1 trillion against its expectation of ₹1.02 trillion from the RBI and PSU banks in the budget. If it were to spend the entire amount via extra expenditure, this could lead to an increase in inflation due to a higher money supply. The final FY25 budget alone would reveal the government’s mind on the issue.

Meanwhile for stock markets, the higher dividend spells good news because it can mean higher government expenditure and hence increased economic growth. Higher capex will be seen as benefitting construction and infrastructure stocks. The bond market has already indicated its bullishness with the yield of the 10-year bond moving towards 7%. This implies higher treasury profits for banks. Hence, bank stocks have a positive rub-off from the RBI dividend.

Also Read: RBI dividend good for fiscal position of the govt: Finance Secretary Somanathan