RBI Halves Dividend Paid To Government For 2016-17

In 2016-17, RBI’s finances were hit by demonetisation, which led to a withdrawal of 86% of currency in circulation.

The Reserve Bank of India will transfer Rs 30,659 crore to the government in the form of dividend for financial year 2016-17, the central bank said in a press release on 10 August.

The dividend is much lower than the Rs 58,000 crore penciled in to the government’s 2017-18 Budget, as reported by BloombergQuint earlier. It is also nearly half of the Rs 65,876 crore paid out by the RBI in the previous year.

Also Read: Why the Status Quo by RBI Post- Demonetisation

The Demonetisation Impact

The RBI’s balance sheet reflects activities carried out as part of its currency issue, monetary policy and reserve management objectives. At the end of each financial year (the RBI follows a June-July year), the central bank transfers the surplus generated from its functions to the government after accounting for any funds transferred to the contingency reserve or the asset development fund.

Over the past two years, the RBI transferred the entire surplus generated to the government via the dividend.

In 2016-17, however, the central bank’s finances were impacted by the government’s decision to demonetise, which led to a withdrawal of 86 percent of the currency in circulation.

This resulted in two additional costs for the RBI.

Firstly, the central bank would have had to spend on printing of new currency. Secondly, the RBI would have borne the cost of sterilising the excess liquidity generated due to the sudden inflow of deposits into the banking system post demonetisation.

While the RBI did not detail a reason, the lower dividend could reflect an impact of demonetisation or a decision by the central bank to transfer some surplus to its contingency reserves.

The amount transferred is much lower than the budget estimate. This is likely to be because of the cost of sterilisation of surplus liquidity in the months after demonetisation... The lower amount transferred could have a bearing on the government’s fiscal position if it is not balanced out by other sources of revenue.  

Soumyajit Niyogi, Associate Director, India Ratings & Research 

Special Dividend Debate

Economists have also been debating whether the RBI would be in a position to pay a one-time special dividend to the government. This would happen if a part of the currency withdrawn from circulation did not return to the banking system. The amount that does not return could potentially be extinguished from the RBI’s liabilities. This, in turn, would allow the central bank to transfer an equivalent amount of assets to the government in the form of a dividend.

Since this has never been done before, it is unclear whether it is possible.

The lower surplus transfer suggests that the expectation of a special dividend has so far not materialised, said Niyogi of India Ratings.

The RBI is yet to announce a full count of the currency deposited in banks during the demonetisation exercise which ran between 10 November and 30 December. A detailed account of the data is likely in the annual report due later this month.

(This article was first published on BloombergQuint)

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