“The additional dividends from the RBI are around 0.35 per cent of GDP. Whether it would support the narrowing of the fiscal deficit in fiscal 2024-25 would really depend on the final budget that would be passed after the June election results,” said S&P Global Ratings Analyst YeeFarn Phua
New Delhi:
India can get ‘rating support’ over time if it utilises the highest-ever dividend of over Rs 2.11 trillion received from the Reserve Bank to reduce fiscal deficit, said an S&P Global Rating analyst on Thursday.
The RBI board has decided to pay a record Rs 2.11 trillion dividend to the government for the fiscal ended March 2024, more than double of what was budgeted expectation of Rs 1.02 trillion.
The RBI board has decided to pay a record Rs 2.11 trillion dividend to the government for the fiscal ended March 2024, more than double of what was budgeted expectation of Rs 1.02 trillion.
“The additional dividends from the RBI are around 0.35 per cent of GDP. Whether it would support the narrowing of the fiscal deficit in fiscal 2024-25 would really depend on the final budget that would be passed after the June election results,” S&P Global Ratings Analyst YeeFarn Phua told PTI.
The interim budget presented in Parliament earlier in the year targets a fiscal deficit of 5.1 per cent of the GDP.
The additional dividend from the RBI may not necessarily lead to a full decrease in the deficit due to potential revenue shortfalls in areas like divestment receipts or additional allocation to expenditures in the final budget, Phua said in an email interview from Singapore.
However, “if it does lead to a full decrease of the deficit, we believe it will lead to a faster path of fiscal consolidation that, in turn, will provide rating support over time”, Phua added.
The government expects to bring down the fiscal deficit to 5.1 per cent of GDP in the current fiscal, down from 5.8 per cent in 2023-24. As per the fiscal consolidators roadmap, the deficit — the difference between government expenditure and revenue — would be brought down to 4.5 per cent by 2025-26.
In May last year, S&P Global Ratings affirmed India’s sovereign rating at ‘BBB-‘ with a stable outlook on growth but flagged weak fiscal performance and low GDP per capita as risks.
‘BBB-‘ is the lowest investment grade rating.
All three global rating agencies — Fitch, S&P and Moody’s — have the lowest investment grade rating on India with a stable outlook. The ratings are looked at by investors as a barometer of the country’s creditworthiness and impact on borrowing costs.
Meanwhile, a report by State Bank of India (SBI) highlighted that following the RBI announcement of a record dividend of Rs 2.11 lakh crore to the central government for the financial year 2023-24, a substantial reduction in the fiscal deficit is on the horizon.
The RBI’s higher dividend will reduce the fiscal deficit of the government by 30-40 basis points from the budgeted level of 5.1 per cent of GDP.
“The declaration of a record dividend by the RBI today was well received by the financial markets, the benchmark yields softening to sub-7% in testimony to the highest ever surplus transfer that is estimated to ease fiscal deficit by 30 to 40 bps from the budgeted level of 5.1% of GDP for FY25 as was set in Interim Budget,” said the report.
The report highlights that the sharp jump in the surplus amount could be attributed to higher income of RBI from the forex holding, among other factors. The dynamics of surplus for RBI was decided by its LAF (Liquidity Adjustment Facility) operations and interest income from its holding of domestic and foreign securities. On the asset sides the provisional RBI balance sheet components show that the RBI domestic assets increased marginally while its foreign assets grew sharply. With higher domestic interest rates and foreign interest rates and possible contracting payable under LAF, RBI surplus swelled in FY24. The increase in the price of gold also added to the overall expansion in RBI balance sheet.
The RBI’s income was Rs 1.6 lakh crore in FY22 and Rs 2.35 lakh crore in FY23. The SBI report projects that for FY24 the RBI income will be around Rs 3.75 to 4 lakh crore. The report says that a nearly 60-70 per cent YoY increase in RBI’s income is expected to be from Interest Income from foreign securities as well as exchange gain from foreign exchange transactions.
The RBI said that the surplus transfer to the government for the financial year 2023-24 is based on the Economic Capital Framework (ECF) adopted by the RBI on August 26, 2019, as per recommendations of the Bimal Jalan committee