Provisions and reverse repo operations hit RBI dividends

MUMBAI: The Reserve Bank of India (RBI) last week paid the government its lowest dividend in 10 years, sharply below what was budgeted. The reason becomes clear in the central bank’s annual report released on Friday: A sharp expenditure surge thanks to a significant transfer to its contingency fund, leaving a limited amount for dividend payouts.

While RBI’S income rose 20.1% in FY22, expenditure shot up more than 280%, as ₹1.15 trillion was set aside as provisions and transferred to the contingency fund.

That was nearly six times the amount set aside last year, the report showed.

Total expenditure rose to ₹1.29 trillion in FY22, up from the previous year’s ₹34,147 crore.

The central bank also had to pay banks a higher amount of interest on excess funds they kept with it through the reverse repo window.

This interest outgo nearly doubled from ₹17,958 crore in FY21 to ₹35,601 crore in FY22.

In the 2022 budget, the government estimated that it would receive ₹73,948 crore as dividend from RBI and staterun lenders for FY22, which would be transferred this fiscal.

“The net interest income from liquidity adjustment facility (Laf)/marginal standing facility (MSF) operations decreased from “(-) 17,945.48 crore in 2020-21 to (-)35,463.66 crore in 2021-22 due to higher surplus liquidity in the banking system leading to higher net interest outgo under LAF/ MSF,” RBI said in the report.

Last week, the RBI board approved the transfer of ₹30,310 crore to the government from its surplus funds, a third of the previous year’s ₹99,120 crore. A lower dividend payout is likely to affect the government’s fiscal deficit, which is already under pressure from fuel tax cuts. “Dividend from RBI has largely been affected by the unprecedented surge in reverse repo amount, which drained out a significant amount. On the other hand, that had helped the sector’s profitability and, subsequently, improved banks’ appetite for lending...the decision to transfer to contingency fund is prudent. Rising geopolitical tension, and tectonic shift in inflation dynamics, all of these are harbingers of a volatile external front. Amid such an environment, balance sheet strength of central banks is paramount, especially for emerging economies,” said Soumyajit Niyogi, associate director, Core Analytical Group, India Ratings & Research.

WHILE RBI’S INCOME ROSE 20.1% IN FY22, EXPENDITURE SHOT UP MORE THAN 280%