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How RBI’s record Rs 2.1 lakh crore dividend payout to government may help improve India’s credit rating

The record Rs 2.1 lakh crore dividend that the government will receive from the Reserve Bank of India (RBI) is a positive development, as it is nearly double the amount budgeted from all financial institutions combined.
Several factors could have contributed to the record profit, including the significant increase in interest rates in the United States, where the RBI invests a substantial portion of its $644 billion foreign exchange reserves (Rs 54 lakh crore), says says a TOI analysis by Mayur Shetty.
Additionally, the RBI has been actively buying and selling dollars this year compared to the previous year, as foreign institutional investors (FIIs) have been selling equities. Furthermore, the RBI’s money market operations have played a role in its earnings. To combat inflation, the RBI has maintained liquidity in a deficit mode, providing opportunities to lend to banks.
RBI serves as both a regulatory body and a monetary authority, responsible for managing the money supply and overseeing foreign exchange markets. To stabilize the rupee against speculative inflows, RBI accumulates foreign currency reserves.
Also Read | Explained: How RBI managed to give the highest ever Rs 2.1 lakh crore dividend payout to government
During challenging times, such as the global financial crisis or the pandemic, central banks expanded their balance sheets through quantitative easing, which involves injecting money into the economy by purchasing bonds from banks.
As a result, RBI earns profits from interest on domestic and foreign bonds, as well as from market operations. In its forex operations, RBI sells dollars it purchased during times of surplus when there is a scarcity, making a substantial profit as these sales are at prevailing market prices.
However, generating profits is not the primary goal for RBI. The surpluses are a byproduct of RBI working towards its objectives of maintaining financial and market stability.
It is often observed that RBI generates more profits during difficult times because it is during crises that the central bank’s intervention in forex and money markets intensifies.
Also Read | Why RBI is stocking up aggressively on gold reserves; central bank buys 1.5 times more gold in Jan-April than entire 2023
Profit cannot be an objective for the central bank in its market operations, as RBI is the biggest insider in the market.
While the RBI can create money, the dividends it pays to the government come from its actual earnings. A significant portion of these earnings is derived from higher interest income on foreign securities and profits from selling foreign exchange. This record surplus could aid India in improving its credit rating, the TOI analysis says.
According to S&P, this additional amount is approximately 0.35% of the GDP. Assuming all other factors remain constant, this windfall would reduce the fiscal deficit by that percentage. S&P has indicated that if the government uses the funds to reduce its deficit (by reducing borrowing), it would increase the likelihood of a ratings upgrade.
An upgrade would enhance India’s standing among global investors, which is a positive sign for markets as it would attract capital inflows. Alternatively, if the government decides to use the windfall to stimulate the economy or provide relief to the poor, it would also be beneficial, as it would boost consumption.
The bond market is rallying due to record revenues generated through dividends and the Goods and Services Tax (GST), leading markets to anticipate a significant decrease in government borrowing. When the government borrows less, more funds become available for corporate borrowers, causing interest rates to decline. As interest rates fall, existing bonds that offer higher rates are sold at a premium.

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