28 Nov 2020

Lower Dividend from RBI Would Lead to Rate Cuts

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RBI is paying the price of demonetization through lower surplus due to cost of sterilizing liquidity.

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Arjun Parthasarathy

RBI is paying the price of demonetization through lower surplus due to cost of sterilizing liquidity. The government has increasingly become more dependent on RBI for higher dividends and lack of dividend will hurt its finances. RBI will look to lower the cost of sterilization by further lowering the repo rate.

The Reserve Bank of India’s Central Board on 10th August 2017  approved the transfer of surplus to the Government of India amounting to Rs 306.59 billion for the year 2016-17 as against  Rs 658.76 billion for the year 2015-16, which is a fall of 53.46% from fiscal 2017-18 budgeted levels of Rs 605 billion. Government’s budgeted revenues for fiscal 2017-18 from RBI and banks in the form of dividends is Rs 749.01 billion. In fiscal 2016-17, the government received Rs 761.71 billion as dividneds of which 86% was contributed by surplus of Reserve Bank of India, which is not the case this year as 44% of budgeted amount is received in the form of surplus of Reserve Bank of India.

Any shortfall in budgeted dividends can force the government to borrow more than its budgeted borrowing from the market as fiscal deficit would rise if there is no compensatory cut in expenditure or rise in revenues from other sources.

Dividend from the RBI for 2016-17 has reduced due to increase in net Interest outgo on LAF Operations and  decrease in profit on Sale of domestic securities as RBI purchased bonds worth Rs 1261 billion through OMO in 2016-17. Demonetization in November 2016 drove liquidity up sharply leading to RBI using reverse repos to sterilize the liquidity.



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