A move by the Reserve Bank of India has given a big relief to the next finance minister on the economic front. The central bank announced on May 22 that it will transfer a surplus of Rs 2.11 lakh crore to the government for FY24. This amount is 62 per cent more than the previous record amount of Rs 1.76 lakh crore transferred in August 2019 and almost two and a half times the Rs 87,416 thousand crore given in FY23.

The Centre had estimated receipts of Rs 1.02 lakh crore, including dividends, from banks and financial institutions in the interim budget. But the central bank’s infusion of double that amount came as a big relief to the stock markets which were nervous during the elections. Following this announcement, the benchmark BSE Sensex closed at its highest level ever at 75,418.04 on May 23, up 1196.98 points or 1.61 per cent.

However, the details of this surplus payment will be known only when the Reserve Bank makes its annual report for FY24 public. Experts say that this surplus would have arisen from higher interest income and increase in foreign exchange reserves of the Reserve Bank due to increase in domestic receipts (yield) along with global. The Reserve Bank said that this surplus was calculated on the basis of the economic capital framework approved by the central bank on August 26, 2019. This framework was recommended by the Dr. Vimal Jalan Committee. The committee had determined that while transferring the surplus to the government, the Reserve Bank would have to keep a contingency risk buffer (CRB) in the range of 5.5 to 6.5 percent of its balance sheet. For FY24, the central bank has maintained this buffer at 6.5 percent.

According to Madan Sabnavis, Chief Economist at Bank of Baroda, the Reserve Bank would have given this amount due to income from three sources. One of these is the variable repo rate auction, which is done to provide more money to the banks. Banks participate in the auction by bidding for the amount notified from the Reserve Bank. This would have given the central bank more than 6.5 percent income on the amount borrowed by the banks. He says, “The second reason would be the foreign exchange operations of the Reserve Bank. Under this, the Reserve Bank regularly buys and sells dollars to keep the currency stable.” The Reserve Bank would have earned income from both buying and selling methods, which depends on the rate at which it bought or sold dollars at that time. Sabnavis explains, “It was also a big part in FY ’23 and in FY ’24, the total purchase and sale was $ 338 billion (Rs 28 lakh crore) which was $ 399 billion (Rs 33.2 lakh crore) in the previous year.”

The third source of income would have been the return from foreign exchange reserves. This reserve has increased by about $ 60 billion (Rs 5 lakh crore) last year. Sabnavis says, “The foreign exchange reserves of $ 570 billion (Rs 47.3 lakh crore) would have given a return of about 4 percent. Due to the sharp increase in interest rates by the Federal Reserve, this yield (income) increased to 3.73 percent in FY 23, which was 2.11 percent in FY ’22.”

Experts say that transferring dividends in excess of the amount estimated in the Reserve Bank’s budget will boost the government’s efforts for fiscal consolidation. In the interim budget presented on February 1, the government had set a target of reducing the fiscal deficit (difference between income and expenditure) to 5.1 per cent of GDP in FY ’25 from 5.8 per cent in FY ’24. Not only this, the government can now reduce its dependence on market borrowing.

The Bank of Baroda research team’s note said that the government could also use the additional resources for more expenditure, primarily for capital expenditure. The government has already raised capital expenditure for FY25 to Rs 11.1 lakh crore or 3.4 per cent of GDP. The huge dividend payout is expected to reduce the government’s dependence on disinvestment programme.

How it will help

, The financial burden of the new government will be reduced

, With its help the government will be able to make more capital expenditure

, will help in reducing fiscal deficit

, Government’s dependence on market borrowings will decrease

, The pressure on the slow-moving disinvestment program will reduce