RBI issues circular on tighter liquidity norms for banks
The Reserve Bank of India (RBI) on Thursday issued a draft circular on the Basel III framework on liquidity standards, which will require banks to set aside more funds to cover their risks.
The ratings agency Fitch on Monday said the record-high dividend transfer by the RBI to the government is equivalent to 0.6 per cent of GDP.
It further said that such a high level of dividends as a percentage of GDP is unlikely to be maintained.
Notably, the board of Reserve Bank of India (RBI), last week decided to transfer a record Rs 2.1 trillion dividend to the government out of the profits earned in fiscal 2023-24.
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This is more than double of Rs 1.02 trillion that was budgeted by the government.
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, Fitch said.
“The RBI recently announced a record-high dividend transfer to the government equivalent to 0.6 per cent of GDP (Rs 2.1 trillion) from its operations in FY24. This is above the 0.3 per cent of GDP expected in the FY25 budget from February, so will aid the authorities in meeting near-term deficit reduction goals,” the rating agency said in a statement.
Fitch said transfers from the 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 a buffer is appropriate to be maintained in the balance sheet, it said.
“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,” Fitch said.
However, such windfall dividend transfer should help to ensure the 5.1 per cent of GDP deficit target for the fiscal year ending March 2025 (FY25) will be met and could be used to lower the deficit beyond the current target.
Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term, Fitch said.
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