A rate cut by the Reserve Bank of India on 6th June last month— bringing the repo rate down to 5.5%—could cast a long shadow on next year’s surplus, potentially reducing the size of the FY26 dividend and, with it, the government’s fiscal headroom. This possibility adds a layer of complexity to the current euphoria over the Reserve Bank of India’s record-breaking ₹2.69 lakh crore dividend to the central government for FY25. It is the highest ever transfer by the central bank, surpassing even last year’s impressive ₹2.11 lakh crore. According to a recent State Bank of India report, this surplus could lower the fiscal deficit by 20–30 basis points—from the budgeted 4.5% to around 4.2% of GDP. The Union Budget FY26 had estimated ₹2.56 lakh crore in dividend income from the RBI and public sector financial institutions, but the actual inflow will now exceed that figure, providing an unexpected fiscal cushion.
This unprecedented pay-out has reignited a long-standing debate: can central bank dividends be a reliable lever for fiscal consolidation? At first glance, the answer appears to be yes. As a form of non-tax revenue, RBI dividends directly boost government income, narrow the fiscal deficit, and reduce borrowing needs. In fiscally constrained years, such windfalls offer much-needed short-term relief and breathing room. However, this seemingly convenient mechanism may carry longer-term costs. As Kenneth Rogoff (1985) argued, politically independent central banks with a strong commitment to low inflation tend to deliver better macroeconomic outcomes. A closer look at the numbers suggests that while such a windfall may ease fiscal pressures in the near term, it cannot be relied upon as a durable or consistent instrument of fiscal policy.
No Strong Correlation with Fiscal Deficit
While the recent dividend may help ease near-term budgetary pressures, the data does not show a consistent inverse relationship between RBI dividends and the fiscal deficit. For instance, between FY13 and FY19, as the fiscal deficit steadily declined from 4.9% to 3.4% of GDP, RBI dividends largely remained under ₹70,000 crore. The dramatic ₹1.76 lakh crore dividend in FY19 was a one-off, stemming from the Bimal Jalan Committee’s revision of the RBI’s capital framework.
Post-pandemic, this relationship became even more disconnected. Fiscal deficits surged to 9.2% of GDP in FY21, while RBI pay-outs fluctuated, reflecting provisioning needs and volatile global conditions. FY22 saw a mere ₹30,307 crore transfer despite heightened fiscal pressure. Since then, improved forex earnings and a rebound in interest income have enabled generous dividends—but these came after fiscal targets had been drafted, not in response to them.
Capex Boom Not Reliant on Dividend
Interestingly, the recent boom in public capital expenditure (capex) has coincided with the recovery in RBI dividend pay-outs. From a modest ₹3.4 lakh crore in FY20, capex is projected to hit ₹11.2 lakh crore in FY26—an impressive CAGR of 22%. Yet, this surge is not dividend-driven. Rather, it reflects a deliberate post-pandemic pivot toward public investment as a growth strategy. Budgetary frameworks, not central bank surpluses underwrite this infrastructure push.
Domestic Income Down, Foreign Gains Soar
The FY25 dividend story is also a tale of shifting income sources within the RBI. Between FY24 and FY25, central bank’s domestic interest income fell by 9.6%, led by a 7.6% drop in earnings from rupee securities and a massive 86.3% fall in interest from the Marginal Standing Facility (MSF)—a signal that banks are relying less on this borrowing tool due to ample liquidity.In contrast, the RBI’s foreign income surged, with interest from foreign securities (mostly U.S. Treasuries) jumping by 48.5%. Net interest income rose 11.7% overall. On the non-interest side, foreign other income rose by nearly 50%, thanks to a fivefold increase in gains from amortisation of foreign securities and a 33% jump in exchange gains.These developments highlight how the RBI has deftly managed its global portfolio to maximize returns—especially at a time when global interest rates have remained elevated. The result is a record surplus that makes headlines, but should not overshadow the broader fiscal context.
Rethinking Central Bank Dividends: Lessons from Global Experience
While windfalls such as ours are prominent, they should not be mistaken for a dependable tool of fiscal policy. The 2019 Bimal Jalan Committee, which reviewed the RBI’s capital framework, stressed the importance of balancing fiscal needs with the central bank’s mandate for stability and independence.Global experiences offer a timely reminder of what happens when that balance is lost. The Bank of England is now projected to cost the UK Treasury £150 billion (₹17.4 lakh crore approx.) by the early 2030s due to rising interest payments and losses from its quantitative easing programme—far exceeding the £125 billion it transferred between 2012 and 2022. Similarly, the US Federal Reserve has suspended dividend remittances as it grapples with operational losses caused by the mismatch between its interest earnings and interest rate liabilities.These cases underscore a common lesson: central bank dividends are inherently volatile, broadly driven by global financial cycles, asset valuations, and monetary policy settings—not fiscal planning. For India, they must remain a bonus, not a budget line. The record FY25 transfer may provide short-term relief, but treating it as a structural source of revenue risks undermining central bank autonomy and exposing public finances to external shocks.
References:
- Data on capex taken from Economic Outlook database of Centre for Monitoring Indian Economy
- Data on dividend taken from Reserve Bank of India, Annual Reports
- https://www.bloomberg.com/news/articles/2025-02-11/uk-taxpayers-face-150-billion-bill-for-qe-bank-of-england-says
- https://neweconomics.org/2025/02/the-bank-of-england-is-costing-us-billions
- https://website.rbi.org.in/web/rbi/publications/reports/annual_report
The views expressed in this article are the author’s own and do not reflect those of any institution or organization.