Modi Government Might Open Third Innings With A Financial Bonanza From RBI: Here's How

The Bharatiya Janata Party (BJP), which is most likely to emerge as the ruling dispensation after the ongoing elections may find itself beginning its third term with a financial bonanza.

The reason is that the Reserve Bank of India (RBI) has indicated it may transfer a higher dividend to the government this year, potentially around Rs 1 lakh crore, offering a significant boost to New Delhi's finances.

Last week, the RBI announced a significant reduction in the government's borrowing through Treasury Bills, cutting the funds the Centre would have raised through these short-term instruments by Rs 60,000 crore.

Additionally, the central bank implemented measures to ensure the success of an upcoming operation where the government plans to prematurely repay Rs 60,000 crore of earlier borrowings.

These actions, aimed at utilising government funds currently idle due to election-related spending constraints, suggest that the Centre's finances could soon see substantial replenishment.

"We expect the RBI to transfer a surplus of INR 1,000 billion (Rs 1 lakh crore) to the government in FY25. While there are many variables in the RBI dividend calculation, our assessment indicates a strong likelihood of a substantial dividend," Union Bank of India's chief economic advisor, Kanika Pasricha, stated in a recent research note.

Calculations by analysts based on public information about the RBI's balance sheet suggest the central bank may surpass last year's surplus transfer of Rs 87,416 crore to the Centre.

A key factor contributing to a large surplus transfer is the sharp increase in interest the RBI would have earned from its foreign exchange assets, driven by aggressive rate hikes by the US Federal Reserve over the past couple of years.

Although the RBI's gross sales and purchases of US dollars were lower in FY24 than in FY23 — a year marked by heavy market intervention to stabilise the rupee — analysts still anticipate a significant boost to the central bank's earnings from foreign assets.