RBI's record dividend invites mixed reactions from economists

The Reserve Bank of India's (RBI) decision to declare its highest-ever dividend of Rs 2.11 lakh crore evoked mixed reactions from economists. While noted economist Suman Mukherjee hailed it as a sign of economic strength, Abhirup Sarkar expressed worries that the dividend could restrict the RBI's ability to rescue lenders in future as the central bank might not have enough money to step in immediately.

"This is not a fluke," Mukherjee told PTI, attributing the windfall to a confluence of factors including a surge in foreign exchange reserves, loans to commercial banks and the government's proactive approach in managing contingencies.

He highlighted that the positive impact of RBI development is evident on the stock market ending in a record high.


Mukherjee downplayed concerns about rising interest rates, suggesting that focus on maintaining low rates will counter potential recessionary effects.

However, Abhirup Sarkar, another noted economist and a former professor at the Indian Statistical Institute, expresses reservations.

Sarkar questions the government's motives, suggesting that deficit reduction might be a primary driver.

He also stated that the payment might not be from its income and the central bank could have used its reserves to pay the hefty dividend.

He cautions against inflationary risks and a decline in real interest rates impacting certain segments.

Sarkar told PTI, "Dividend would also enable the government to borrow less from the market, potentially reducing borrowing costs and stimulating corporate investments."

However, he cautioned against the inflationary impact of injecting liquidity into the market, foreseeing a decline in real interest rates that could adversely affect retirees and individuals reliant on interest income.

Sarkar's primary concern centres around the potential weakening of the RBI's financial strength and independence.

Sarkar, a former chairman of the 5th West Bengal State Finance Commission, raised concerns about the RBI's record dividend weakening the institution.

"RBI needs war chests for emergencies, like rescuing troubled banks," says Sarkar, highlighting the importance of reserves.

He expressed worries that the dividend could restrict the RBI's ability to rescue banks in future as the central bank might not have enough money to step in immediately.

"It may limit the ability to manage liquidity through open market operations and forex interventions to stabilise the Rupee in the future," the economist said.

Sarkar feared the government was undermining the RBI's independence.

He was sceptical about the government's actions, emphasizing the need to safeguard the autonomy and efficacy of the RBI in maintaining financial stability.