RBI's Rs 2.1 lakh crore payout: When it all adds up to deliver a windfall to govt

If the Reserve Bank of India (RBI) had private shareholders, as it had before 1949, they would have been a happy lot on Wednesday evening. The old lady of Mint Street will deliver its bounty from the financial markets - by far the most generous payout it has ever made - to New Delhi. At a time when some of the central banks in the advanced world have reported losses and negative equity, RBI will hand over a dividend cheque of more than ₹2.1 lakh crore to its sole owner, the government.

However, the optics of the event - a monetary authority headed by a former bureaucrat making a huge transfer to a macho government towards the end of a long, noisy general election - masks a more prosaic truth. The payout number is a function of local and offshore currency and money markets, coupled with RBI's active intervention in the foreign exchange market.

FY24 WAS DIFFERENT

What contributed to RBI's higher earnings? First, the higher returns from $469 billion investments in sovereign securities of the first-world governments - of which US treasury bills account for about $250 billion. The interest income from these risk-free bonds (which are part of the forex reserves kitty along with gold which earns nothing), has been distinctly higher in FY24 (at almost 4% returns from US T-bills) compared with the previous year.

Second, the interest earned from short-term lending to liquidity-starved commercial banks - a transaction commonly called repo (or repurchase agreement). Unlike in FY23 when there was 'surplus liquidity' in the local money market - driving banks to park extra funds with RBI - it was largely a 'deficit' situation in FY24, pushing banks to borrow from RBI. Thus, as against in FY23 when RBI had to pay interest to banks (under reverse repo), in FY24 it received interest from banks (under repo).

Third, the gains booked by the RBI through its 'gross sale' of dollars.

THE DOLLAR SALE STORY
It's the last source of gains that appears to have made a difference, resulting in doubling the size of the dividend from what was stated in the government's interim budget on February 1.

Every dollar the RBI sells from its basket of forex reserves to cushion the rupee earns a 'profit', which is the difference between the prevailing rupee/dollar exchange rate at which the dollar is sold and the average cost (of the exchange rates) at which it had bought dollars at different points in the past.

Suppose, this average cost or purchase price is 78 and it sells dollars at 83, RBI makes a gain of ₹5 for each dollar sold. Given a gross sale of over $150 billion in FY24, a sizeable part of the dividend is explained by a series of such transactions which were primarily done to generate the payout amount.

The story is better captured in the RBI's 'net purchase' (as opposed to the 'gross sale'). Net purchase is the difference between gross purchase and gross sale of dollars in the forex spot market. With a balance of payment surplus in FY24, RBI made a 'net purchase' of $41 billion.

RBI sells dollars to support the rupee when the currency comes under pressure. Hypothetically, if there is a $5-billion shortage, RBI can either directly sell $5 billion to add to the dollar supply; or, it can sell $25 billion and buy back $20 billion, to generate a net supply (or sale) of $5 billion. It's the latter which RBI did during the year. Why? Because gains can be booked through gross sales - the higher the gross sale, the higher the gains from dollar sales, and more is the elbow room to declare a bigger dividend.

WHAT ABOUT FY25?
All this, however, diminishes the scope to post similar gains and the opportunity to offer large dividends in subsequent years. Why? When RBI does large dollar purchases (on the back of large gross sales) as it did in FY24, the average cost of dollars in the reserves basket rises. As it buys more and more dollars at the current rates of 82 or 83, the average cost of the reserves inches up from 78 to a higher number, say, 80. So, unless the rupee further falls this year, it would be difficult to book similar gains in FY25. Will that make it tougher for Shaktikanta Das's successor to announce an impressive dividend next year?

There are too many moving pieces for an easy answer. Will earnings from other sources come down? Will the market turn volatile? Will more from the reserves have to be set aside as buffers?

Das's team has been conservative in building a higher buffer against contingent risks (at the upper band of 6.5% of the book compared to the permissible range of 5.5-6.5%). The central bank also has to provide for economic capital, which is linked to volatility and calculated by a dynamic model. This too is understood to have been raised by some notches from the historical level of 20.5%.

Buoyed by higher yields in global markets and aggressive forex sales, Das has done his bit. Now, it's up to the North Block whether to bet on a lower fiscal deficit or higher spending.