A passerby looks on at the entrance to the Reserve Bank of India’s (RBI) Central Office on Shahid Bhagat Singh Road in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

RBI To Transfer Rs 28,000 Crore As Interim Dividend To Government

The Reserve Bank of India will transfer an interim dividend of Rs 28,000 crore to the Government of India, it said after a meeting of its central board on Monday. The dividend transfer is likely to help the government meet its revised fiscal deficit target of 3.4 percent of GDP for 2018-19.

The decision was taken based on a “limited audit review and after applying the extant economic capital framework,” said the RBI in a release.

“It’s not a surprise for the bond market,” said Manish Wadhwana, HSBC India’s head of fixed income and global markets. “It’s on the expected lines and I really don’t expect much to change in bond markets because of this announcement on Wednesday.” The bond market will remain closed on Tuesday on account of a bank holiday.

This is the second consecutive year that the RBI has transferred an interim dividend. Since the RBI’s financial year runs from July to June, it typically transfers the surplus that it earns in the form of a dividend in July or August every year.

For 2017-18, the RBI had transferred a total of Rs 50,000 crore to the government. Of this, Rs 10,000 crore had been transferred in the form of an interim dividend.

“The question is whether there should be announcement of an interim dividend every year, because one should wait for the entire year to complete before concluding on the results of your business operations,” said R Gandhi, former deputy governor of the RBI.

In the case of central banks, things can change suddenly at any point of time as the income of the RBI, for instance, is heavily dependent on interest rates and exchange rates. These are not easily predictable. Though it is permissible and from an accounting standard you can draw the balance sheet for the half-year and arrive at the surplus for that half-year, the issue is whether it is a prudent thing to do.
R Gandhi, Former Deputy Governor, RBI

As a principle, interim dividends are not a great practice as we are advancing the receivables of next fiscal year into this fiscal year, said Ananth Narayan, associate professor of finance at SP Jain Institute of Management and Research.

Both with the advance dividend of Rs 10,000 crore last year in March 2018, and now Rs 28,000 crore in March 2019, effectively, we are dipping into future earnings to pay for current expenditures.
Ananth Narayan, Associate Professor of Finance at SP Jain Institute of Management and Research

Meeting The Fiscal Deficit

The transfer will likely help the government come closer to meeting its revised fiscal deficit target of 3.4 percent of GDP.

As part of its revised estimates for FY19, the government has accounted for Rs 74,140 crore in dividends from banks, financial institutions and RBI. This is higher than the budget estimate of Rs 54,817 crore. The RBI had transferred a Rs 40,000 crore annual dividend in August.

In comments following the budget, Subhash Garg, secretary, Department of Economic Affairs, said that the government is expecting another Rs 28,000 crore as interim dividend from the RBI.

The practice of using RBI interim dividends to balance the budget has been frowned upon by some.

In a recent speech, former RBI governor YV Reddy said that such interim dividends contradict the spirit of putting in a limit on ‘ways and means advances’ which are intended to meet any short-term funding mismatch that the government faces.

The announcement will help calm the debt markets as government borrowings would have gone up if the dividend transfer hadn’t been announced, said Devendra Pant, chief economist at India Ratings. Pant, however, said the message behind interim dividends is disturbing.

The practice of paying an interim dividend didn’t come in till last year. Last year the interim dividend was Rs 10,000 crore and this year it is Rs 28,000 crore.  If the amount keeps increasing every year then that gives an impression that this is being done because of the fiscal arithmetic, which is disturbing.  
Devendra Pant, Chief Economist, India Ratings

Also read: Government Asks RBI To Transfer Surplus Held Back In Previous Years

What Determines RBI Dividends

The central bank transfers the surplus generated from its operations in the money markets, debt issuances and liquidity operations to the government after funds are first transferred to its contingency reserve or the asset development fund.

The dividend transfers to the government have risen over time but the payout from the central bank dropped substantially from Rs 65,896 crore in 2015-16 to Rs 30,659 crore in 2016-17. This was due to the costs borne during the demonetisation period. The payout, however, normalised in 2017-18.

Beyond the immediate transfers, the government and the RBI are in the process of reviewing the central bank’s economic capital framework which determines how much capital and reserves the RBI should hold.

An expert committee has been set up under the leadership of former RBI governor of Bimal Jalan. Additionally, Rakesh Mohan, former deputy governor of the central bank, is vice chairman of the committee.

The mandate for the ECF committee is to “propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required,” the central bank said in a statement released in December 2018.

The call for an interim dividend, which may include funds transferred to the contingency reserves in FY17, comes even before that panel submits its report. Some experts see this as “coercive monetisation of the deficit”, Reddy had said in his speech.

However, in its Monday release, the RBI did not specify whether past transfers to contingency reserves have been reversed. Since the central bank said that the transfer was being made under the “extant economic capital framework”, past reserve may not have been transferred.

Unfortunately, my fear is that this will be seen through the prism of the conflict between the RBI and the Finance Ministry and this will be seen as a kind of arm-twisting, which it isn’t. This decision should be de-linked from the surplus transfer issue, which is a decision that is pending and will be decided by the committee.
Abheek Barua, Chief Economist, HDFC Bank

According to Gandhi, the Jalan Committee will likely explore whether the practice of interim dividends should be continued and under what terms and conditions.

Also read: Government To Push RBI To Put In Place A New Dividend Policy