Significant RBI Dividend to Government Viewed Positively for India's Rating by Fitch

Fitch, the global rating agency, perceives the substantial Reserve Bank of India (RBI) dividend of Rs 2.1 lakh crore to the government, announced recently, as a favorable development for India's sovereign rating fundamentals. According to Fitch Ratings' report released on Monday, "The larger-than-anticipated RBI dividend to the government is expected to facilitate the achievement of the 5.1 percent of GDP deficit target for the fiscal year ending March 2025 and could potentially contribute to reducing the deficit below the current target."

The new government budget, which will come after June's declaration of results, is also due to be presented in July, wherein the decision for using this dividend will be taken. The government has shown its resolve to progressively reduce the deficit to 4.5 percent of GDP by FY26. Fitch Ratings emphasized that sustained reduction in the deficit, especially if supported by enduring revenue-raising reforms, would have a positive impact on India's sovereign rating fundamentals in the medium term.

The RBI's announcement of a historically high dividend transfer to the government, equivalent to 0.6 percent of GDP or Rs 2.1 lakh crore from its operations in FY24, exceeds the 0.3 percent of GDP anticipated in the FY25 budget from February. This surplus will assist the authorities in meeting their immediate deficit reduction objectives.

One of the primary drivers of increased RBI profits seems to be higher interest revenue on foreign assets, although a detailed breakdown has not been provided by the Central bank yet. In the aftermath of the elections, the new government's budget has two potential courses of action. Firstly, it could maintain the current deficit target for FY25, utilizing the windfall to further enhance infrastructure spending or counter unexpected increases in expenditure or lower-than-expected revenue, such as from divestments. Instead, the windfall could be wholly or partially saved, possibly driving the deficit below 5.1 percent of GDP. The action of the government will bring more clarity on fiscal priorities in the medium term for sure as featured in the Fitch report.