Finance Ministry thinking how to increase dividend from RBI
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The Ministry of Finance is actively involved in the Reserve Bank of India’s (RBI) ongoing review of its rules about capital buffers. These capital buffers determine how much money the RBI can send to the government as dividends.
Since January this year, RBI officials have been reviewing the central bank’s Economic Capital Framework (ECF). The ECF is a set of guidelines that decide how much money the RBI should keep aside as a safety reserve. This framework was last reviewed in 2018 by a committee led by former RBI Governor Bimal Jalan. The committee’s recommendations were adopted by the RBI in 2019.
On Thursday, the RBI announced that its central board had held its 615th meeting and discussed the review of the ECF. At the same time, the Ministry of Finance is running a separate, parallel review of the same framework to form its own opinions.
A government official familiar with the matter told The Hindu, “The RBI and the government are both reviewing the capital buffer rules independently. Many believe that the Jalan committee’s recommendations were too cautious, meaning the RBI kept too much money aside. There might be room to reduce these buffers. We will wait to see what the RBI decides, but the government will also share its own views.”
The Jalan committee had suggested that the RBI maintain a Contingency Risk Buffer (CRB) of 5.5% to 6.5% of its total balance sheet. The CRB is like a safety fund the RBI holds to protect against financial crises that could affect the country’s economy. Once the RBI meets this buffer requirement, any extra money can be given to the government as a dividend.
If the RBI lowers this buffer, it means the central bank can transfer more money to the government. This is important because the government is planning to increase its defence budget this year, mainly due to ongoing tensions with Pakistan.
The government official added, “We are not worried about our finances even if defence spending goes up. But if the RBI can safely send more money to the government, without risking financial stability, it would give us more flexibility to manage our budget.”
In the financial year 2023-24, the RBI transferred a record ₹2.1 lakh crore to the government. This amount was much higher compared to the ₹87,416 crore transferred the previous year. Experts expect the RBI’s dividend transfer for 2024-25 to be between ₹2.5 and ₹3 lakh crore.
