Government may get bumper RBI dividend in FY24

In the Union Budget for FY23-24 announced by the finance minister on 01st February 2023, the total dividend receipts from dividends from PSU banks and RBI was pegged at Rs48,000 crore. That conservatism is understandable considering that in the previous year FY23, the RBI dividend was much short of expectations and the actual collections from RBI and PSU bank dividends was just about 60% of the full year target. However, the good news is that in FY24, the RBI may announce a bumper dividend. Last year, the RBI had been conservative and made a contingency provision of Rs115,000 crore to factor in the potential losses on foreign securities held by the RBI in its reserves. This would have depreciated with rising rates globally. However, with most of the provisions done, more will not be required. Here is the total dividend paid by the RBI in the last 10 years.

For FY22, the RBI gave a little over Rs30,000 crore and even if you add the PSU bank dividends it would not cross Rs40,000 crore taking the total dividend actuals to just about 60% of the Rs73,000 crore budgeted by the government. In contrast, the budget for FY24 is only Rs48,000 crore, but actually it could be much higher is the expectation. The Centre will probably get a windfall gain by way of annual dividend receipts from the Reserve Bank of India (RBI). That is the street estimate as of now.

What could drive the bumper dividend by RBI?

One reason could be the large level of dollar sales and low provisioning requirements in this year. For instance, the RBI dividend is expected to exceed Budget estimates by a vast extent and could range up to Rs80,000 crore, almost doubling the actuals versus the target for the Union Budget. This will be positive for the government as the better-than-expected RBI dividend will offset some of the risks facing tax revenue collections in FY24 due to slower than budgeted growth in nominal GDP.

Just to give a picture, the combined gains out of foreign currency sales and interest on loans to the local banking system is likely to be more than the mark-to-market (MTM) losses on bond portfolios (both local and overseas). For the first 11 months of the year the central bank had sold gross $206 billion in dollar sales up from $96 billion in year ago period. Also, the revised accounting framework recommended by Bimal Jalan stipulates that accounting of forex operations be linked to historical costs. This will also be a booster for revenues.

Here are how the calculations will work out. Average historical cost of dollar purchases is estimated around Rs63 a unit but market price at which RBI sold dollars averaged Rs80 per dollar. At $96 billion in FY22, the RBI earned close to Rs68,990 crore so with gross selling at $200 billion, the gains should be much higher. That itself should make enough room for higher dividends by the RBI to the government. There is also the spread that the RBI would have earned on the LAF as it had been in reverse repo mode for most of the year. Higher interest income is expected since the benchmark repo rates against which it lends to banks was up by 250 basis points during the year. The bottom line is that there is the recipe for a bumper dividend from the RBI this year.