In this unprecedented time of economic contraction and much uncertainty, the larger RBI dividend would proactively improve government finances and reduce market borrowings.
The RBI move to transfer Rs 99,122 crore as surplus to the Centre, while duly maintaining its contingency risk buffer at 5.5% as per the Jalan committee report, is significant. Not being a commercial organisation, RBI’s surplus payment to the government is not termed a dividend. But RBI does need to bolster its capital to meet contingent risks and maintain financial stability, even while transferring its surplus to shore up the exchequer.
Note that RBI’s varied roles as monetary authority and guarantor of financial stability entail significant contingent risks. For instance, it can mean exposing the central bank to currency risks on more than three-fourths of its balance sheet. In the past, mark-to-market losses of 1-1.5% of GDP have, indeed, occurred. Besides, international evidence suggests that central banks’ financial resilience does boost their policy efficacy proactively. The latest transfer of RBI surplus to the Centre, at just under 0.5% of GDP, is larger than that in the previous fiscal, which was just over Rs 57,000 crore. Note also that the latest surplus is for a nine-month period, July-March, as RBI has now aligned its accounting year with that of the government. In this unprecedented time of economic contraction and much uncertainty, the larger RBI dividend would proactively improve government finances and reduce market borrowings.
The risks arising from RBI’s monetary and non-monetary policy operations do need to be actively managed. Hence, a prudent economic capital base for the central bank is clearly warranted. RBI’s financial resilience is most appropriate to duly absorb the impact of its policy risks. We do need strong institutional mechanisms in times of heightened economic stress. And, these are such times.