Fitch Ratings views the Reserve Bank of India's (RBI) larger-than-anticipated dividend of Rs 2.1 lakh crore to the government, disclosed last week, as a positive development for India's sovereign rating fundamentals.
According to a report released on Monday, Fitch stated, "The larger-than-expected RBI dividend to the government should help to ensure the 5.1 per cent of GDP deficit target for the fiscal year ending March 2025 will be met and could be used to lower the deficit beyond the current target."
The upcoming government budget, expected after the release of election results in June and likely to be presented in July, will dictate the utilisation of this dividend. The government has indicated its intent to gradually narrow the deficit to 4.5 per cent of GDP by FY26. Fitch believes that sustained deficit reduction, especially if supported by lasting revenue-raising reforms, would enhance India's sovereign rating fundamentals in the medium term.
The RBI's announcement of a record-high dividend transfer to the government, equivalent to 0.6 per cent of GDP or Rs 2.1 lakh crore from its FY24 operations, exceeded expectations. This surplus will aid the authorities in achieving near-term deficit reduction objectives. The primary reason behind the increase in RBI profits appears to be higher interest revenue on foreign assets, although a detailed breakdown is yet to be provided by the Central bank.
Faced with this windfall, the new government's post-election budget presents two possibilities. Firstly, it could maintain the current deficit target for FY25, utilising the surplus to further bolster infrastructure spending or offset unforeseen spending increases or revenue shortfalls, such as from divestments. Alternatively, the windfall could be partially or entirely saved, potentially reducing the deficit to below 5.1 per cent of GDP. The government's decision in this regard would offer greater clarity on its medium-term fiscal priorities, as outlined in the Fitch report.
