IGI Logo

Fitch Ratings in its latest report has said that the larger-than-expected Reserve Bank of India (RBI) dividend to the government should help to ensure the 5.1% of Gross domestic product (GDP) deficit target for the fiscal year ending March 2025 (FY25) and could be used to lower the deficit beyond the current target. The new government’s budget following the release of election results in June is likely to be presented in July and it will determine how the dividend will be used.

The report said the government has signalled it aims to narrow the deficit gradually to 4.5% of GDP by FY26. Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term. The RBI recently announced a record-high dividend transfer to the government equivalent to 0.6% of GDP (Rs 2.1 trillion) from its operations in FY24. This is above the 0.3% of GDP expected in the FY25 budget from February, so will aid the authorities in meeting near-term deficit reduction goals. An important driver of higher RBI profits appears to be higher interest revenue on foreign assets, though the central bank has not yet provided a detailed breakdown.

According to the report, in its post-election budget, the new government has two alternatives. First, the government could opt to keep the current deficit target for FY25, and the windfall could allow the authorities to further boost spending on infrastructure, or to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment. Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1% of GDP. The government’s choice could give greater clarity around its medium-term fiscal priorities. Transfers from RBI to the government can be significant at the margin for fiscal performance, but depend on various factors, including the size and performance of assets held on the central bank’s balance sheet and India’s exchange rate. Transfers may also be influenced by the RBI’s views on what level of buffer is appropriate to maintain on its own balance sheet. The potential volatility of transfers means there is significant uncertainty about their medium-term path, and we do not anticipate that dividends as a share of GDP will be sustained at such a high level.