Economic Update : RBI Annual Accounts : Strong foreign income drives yet another record dividend By Emkay Global Financial Services Ltd
The bumper RBI dividend of Rs2.7trn was on account of higher foreign interest income and gains on heavy FX sales, even as provisions rose marginally. Higher income allowed the RBI to raise the Contingent Risk Buffer to 7.5% of the balance sheet (BS) even as it maintained a healthy dividend. Balance sheet growth of ~8% was led by higher gold holdings and heavy OMOs in 4Q. The additional fiscal buffer of ~0.15% of GDP will not change the Centre’s fiscal math; we maintain FY26E FD/GDP at 4.4%. System liquidity is expected to surge to a healthy surplus of ~1.6-1.8% of NDTL by 1Q-end, which will not impede the RBI’s easing cycle. We expect 10Y yield to ease to 6% by end-CY25, with a strong bull-steepening bias for the yield curve in the near-term.
Record dividend led by surge in foreign interest income and FX sale profits
The RBI’s record dividend of Rs2.68trn for FY25 (FY24: Rs2.1trn; ~27% YoY) was largely on account of higher income (~23% YoY), even as provisions were marginally higher. Interest income rose ~12% YoY to Rs2,107bn, primarily due to higher interest from foreign security holdings (~48% YoY), even as interest from domestic securities declined ~8%. With the RBI’s gross FX sales for FY25 at ~Rs390bn (more than 2x of FY24), the gain from FX transactions rose ~33% to Rs1,111bn. As a result, share of foreign income in the RBI’s total income has risen to ~77% for FY25 (vs 68% in FY24). On the expenditure front, provisions rose marginally to Rs449bn (FY24: 428bn), due to the contingent risk buffer (CRB) being raised to 7.5% of the balance sheet (FY24: 6.5%). Notably, with unrealized MTM gains on both, domestic and foreign security holdings in FY25, provisioning would not have been needed if the CRB was not raised – in fact, at 6.5% CRB, the dividend would have been as high as Rs3.1trn, ceteris paribus.
Balance sheet rises ~8% on the back of higher gold holdings and heavy OMOs
The RBI balance sheet rose ~8% in FY25 (FY24: ~11%); however, balance sheet growth had been anemic until 3QFY25, recording negative growth (around -1%), and only picked up in 4Q, led by OMO purchases of ~Rs2.5trn during the quarter. In fact, the RBI’s 3Y balance sheet CAGR was merely ~4% until Dec-24 and, even with the pickup in 4Q, is only ~7% for FY25. RBI’s total holdings of domestic securities rose ~14% as a result. Total gold holdings rose ~52% YoY to ~Rs6.7trn, due to higher gold prices, rupee depreciation, and addition of ~57.5 metric ton to the RBI’s holdings during FY25. The RBI’s physical holdings are thus at ~880 metric ton. Other major drivers of balance sheet growth included higher loans to banks (~31% YoY), on account of higher repo operations – with system liquidity having been in a heavy deficit, in 4Q especially.
Marginal fiscal boost will not move the fiscal needle; FY26E FD/GDP at 4.4%
While this is the third consecutive year where the dividend has exceeded the government’s budgeted amount, the surprise is modest (28% higher than budgeted vs 160% last year). As of now, we do not expect the Centre’s fiscal math to change drastically on account of the higher dividend (FY25BE: Rs2-2.1trn). The incremental gain, amounting to ~0.15% of GDP, is expected to partly offset potential shortfalls in tax revenue and lower-than-expected nominal GDP growth. Accordingly, we maintain our FY26E gross FD/GDP target at 4.4%, in line with the budget estimate.
Liquidity surge expected by 1Q-end, without impeding rate cut cycle
Supported by the strong RBI dividend, system liquidity is likely to improve further. We expect 1QFY26E to be in super surplus liquidity (with June tracking ~4-4.5trn, ~1.6- 1.8% of NDTL), led by the higher dividend and a sharp seasonal moderation in currency in circulation (CIC), along with RBI OMOs. The CIC drag is expected to reduce seasonally to ~Rs900bn in 1QFY26E, from ~Rs1.6trn in 4QFY25. However, system liquidity surplus is likely to ease to sub-Rs1.5trn October onward, only to improve to ~0.9-1.1% of NDTL by end-Mar-26. Even though we see a liquidity deluge in coming months, we do not see it impeding a June rate cut/depth of the easing cycle. We maintain that the terminal policy rate could reach 5.25% (+/-0.25%), while system liquidity will still end FY26 on a surplus of ~0.9-1.1% of NDTL – lower than in the past easing cycles. That said, improving transmission tools should help in better real-sector percolation. We expect the 10Y yield to ease to 6.0% by end-CY25, while the case of bull steepening bias is likely to strengthen
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