Deciphering RBI’s record dividend

The Reserve Bank of India stunned everyone with an unexpected highest ever dividend of ₹2.11-lakh crore this year. And details that accompanied initially were a bit confusing rather than illuminating. While the Total Income increased only by 17.04 per cent, RBI paid a dividend 2.4 times that of FY23. And simultaneously increased provisions from 6 per cent of total assets to 6.5 per cent.

How was RBI able to do both? Corporates sometimes do make large payouts by dipping into their reserves. Here RBI, on one hand made a record dividend payout; and with the other hand, increased provisions and strengthened its balance sheet even on its historically highest asset base. And when one reads the balance sheet, more questions get thrown up.

Last year, RBI provisioned ₹130,875.75 crore on a smaller balance sheet and increased the total Available Realised Equity (that is, Provisions plus Capital and Reserves) from 5.5 per cent to 6 per cent. And balance sheet size went up by just 2.5 per cent last year. But this year, balance sheet went up by 11 per cent. But with a much lesser provisioning of ₹42,819.91 crore it had further increased the provisioning by another 0.5 per cent to 6.5 per cent. It appears as a conundrum.

A further look at the income statement shows that RBI had sent ₹42,819.91 crore to Contingency Fund. But the Contingent Fund had gone up by ₹77,415.34 crore. Where did the additional ₹34,595.43 crore come from? And a last major question on everyone’s lips: Will RBI be able to repeat such a high payout or similar payouts year after year?

Well. We will answer all these questions; may be, not in the same order.

RBI’s income statement consists of four major components: Income, Expenditure excluding Provisions, Provisions and finally Dividend Payout.

A) Income: RBI’s income majorly consists of the following. (1) Interest from Loans and Advances to banks as well as State and Central governments; (2) Income from foreign and rupee assets; (3) Commissions and other income; and (4) Surplus lying in revaluation accounts that get transferred to the Income statement on maturity/sale.

B) Expenditure excluding Provisions: RBI’s expenses like printing of notes, employee costs, depreciation, etc., for running its operations are extremely low and stable over the years. These are typically less than 10 per cent year after year (see Table 1).

Essentially, every year, around or more than 90 per cent of the income is available with RBI to allocate to Provisions and Dividends.

C) Provisions: As per Bimal Jalan’s formula, RBI should maintain its Available Realised Equity between 5.50 per cent and 6.50 per cent of total assets.

D) Dividend payout: After meeting the above, the balance surplus should be paid to government.

Assets, Revaluation of Assets

RBI has, over the years, built up the following two assets: (A) Foreign Assets like dated securities, T bills, SDRs as well as gold; and (B) Rupee Assets like Indian Treasury bonds.

These assets fluctuate in value daily. As per its accounting policy, RBI does not carry “Mark to market” fluctuations to the Income statement, unless the Asset is sold/redeemed. But parks variations in four different revaluation accounts. They are Currency and Gold Revaluation Account (CGRA), Investment Revaluation Account Foreign Securities (IRAFS), Investment Revaluation Account Rupee Securities (IRARS) and Foreign Exchange Forward Contracts and Valuation Account (FCVA).

When any of these assets are either sold or mature, the corresponding profit or loss are brought to the Income statement.

CGRA always carries a huge credit balance, due to constant currency depreciation and gold appreciation. But the other three accounts can have a debit or credit balance, which is squared only on sale/maturity.

What happens on year closing

On March 31, if there are any debit balances in revaluation accounts, they are transferred to Contingency Fund; so that when provisioning for next year’s Contingency Fund, it is calculated after debit balances are posted.

On the very next day, these debit entries are reversed from Contingency Fund and put back in their respective accounts.

Thus, while provisioning is done only for all “unrealised revaluation losses”, “unrealised revaluation profits” are never adjusted while provisioning. A conservative approach.

Contingency Fund between two successive years: If there are negative debit balances posted on March 31 for year “Y”, since these are reversed on April 1 of the following year, closing balance on March 30 of “Y+1” will be higher to the extent of accounting reversals done on April 1.

To this balance, further debit entries should be done, if any, pertaining to “Y+1”, before calculating provisioning for “Y+1”.

What happened between FY23 and FY24 is shown in Table 2.

Though there were debits posted in both these successive years, since debits were less for FY24 than FY23, RBI could transfer just ₹42,819.91 crore, while moving up Contingency Fund by ₹77,415.34 crore.

Additional Contingency requirement versus asset growth: Supposing, debit balances for FY25 are lower than that of FY24, Additional Contingency Fund requirement would be a maximum of 6.5 per cent of Asset growth, asRBI had already met 6.5 per cent requirement in FY24. Asset growth during the past six years is given in Table 3.

What can increase the Balance Sheet Assets in FY25?: (A) Growth in printed notes; (B) Growth in CRR deposits with RBI due to deposit growth in banking system; (C) Revaluation of either Foreign or Rupee Assets due to currency depreciation, gold prices or lower bond yields.

Growth in printed notes: In a non-digital economy, currency is needed for financial transactions (including for parallel economy) as well as wealth storage (including ill-gotten). Hence in the past, printed notes growth far exceeded the nominal GDP growth. During 2013-14 to 2019-20, currency in circulation went up by 96 per cent while the nominal GDP grew by 79 per cent. Subsequently, with digitisation of the economy, the public’s demand for currency went down and currency growth had been much lower than GDP. It had been 7.26 per cent, 9.86 per cent, 7.81 per cent and 3.88 per cent during last four years.

Growth in CRR deposits with RBI: This will grow in line with deposit growth in banking system. Currently bank deposits are growing at 13 per cent.

Revaluation of gold, Foreign and Rupee Assets: Bank rates will likely reduce both in the US and India by this year end. This will increase the “mark to market” values of both foreign and Indian securities and subsequently the Revaluation Assets. Currency may hold steady. While gold prices are uncertain, given its low share in RBI’s assets, we can ignore it.

Let us summarise the basis on which we would forecast the “Dividend payout for FY25”.

(1) An RBI Asset growth beyond 10 per cent appears unlikely, as currency notes contribute to 50 per cent of balance sheet size.

(2) Return on Assets had ranged from 2.3 per cent to 4.7 per cent in the past. But it could be 4 per cent or lower depending on rate cut (see Table 4 )

(3) Since provisioning had been fully met at 6.5 per cent, additional need will be confined to 6.5 per cent of Asset growth. Nothing more, if “debit carry forwards” are also favourable. (And they would be, in a ‘rate cut’ scenario.)

A full matrix of likely dividends in FY25 under different Asset growths and per cent Return on Assets scenarios is given in Table 5. (A liberal expense of ₹ 25,000 crore is assumed; refer past data in Table 1)

Since RBI provides Assets and Liabilities data weekly, we can track Asset growth. Similarly, by tracking the bond yields in US and India, we can guestimate per cent return of Assets band. And our estimates can be further sharpened as the year pans out. But Table 5 assures us that a good dividend is more likely than unlikely.

The writer, a retired veteran with international experience in auto industry, likes to dabble in macroeconomics