RBI dividend will have economic dividends

An outstanding dividend by RBI provides the incoming government more elbow room to reach its medium-term fiscal target or improve the deficit’s composition to drive more capex. In the first eventuality, GoI could help lower interest rates by trimming its borrowings. This, in turn, creates space for RBI to cut back on interest rates sooner. The second option of GoI speeding up its capex cycle allows for direct intervention in growth by crowding in private investment. Another policy course emerges from the RBI bonanza, priming consumption through tax giveaways. This seems to be the least likely scenario in a third term for NDA, which has deprioritised this approach.

RBI came into this windfall because of high interest rates in advanced economies, which may persist before an eventual cyclical inversion. The strength of India’s recovery from the pandemic also contributed to the RBI surplus, and monetary policy would be inclined to pursue this course by easing interest rates ahead of the pack. Inflation is offering comfort on the demand side for an interest rate downcycle. Food inflation, less amenable to demand management, remains a concern.

The magnitude of RBI’s dividend, surpassing GoI’s budgeted amount from the public sector, is a significant development. With PSUs gaining market capitalisation, the dividend flow is expected to remain robust in the medium term. This could potentially influence the pace of privatisation, particularly when the ripple effects of government capex are strongly felt by PSUs. The stability of dividends as a revenue source, compared to the market-dependent capital receipts from divestment, may also factor into the government’s decision-making, potentially leading to a slower fiscal glide path.