The potential impact of RBI’s historic Rs 2.1 lakh crore dividend payout on India’s credit rating

The government of India is set to receive a record-breaking dividend of Rs 2.1 lakh crore from the Reserve Bank of India (RBI), nearly double the amount budgeted from all financial institutions combined. This windfall is a positive development for the country, with several factors contributing to the record profit.

According to a TOI analysis by Mayur Shetty, the significant increase in interest rates in the United States has played a role in the RBI’s earnings. The central bank invests a substantial portion of its $644 billion foreign exchange reserves in the US, and the higher interest rates have led to increased profits.

Additionally, the RBI has been actively buying and selling dollars this year, especially as foreign institutional investors have been selling equities. The central bank’s money market operations, aimed at maintaining liquidity in a deficit mode to combat inflation, have also contributed to its earnings.

While generating profits is not the primary goal for the RBI, the surplus is a byproduct of its efforts to maintain financial and market stability. The record surplus could help improve India’s credit rating, with S&P indicating that it could reduce the fiscal deficit by approximately 0.35% of the GDP.

The news of the record dividend has led to a rally in the bond market, with markets anticipating a significant decrease in government borrowing. This could lead to lower interest rates, benefiting both corporate borrowers and consumers. Overall, the windfall from the RBI is seen as a positive sign for the Indian economy, attracting global investors and potentially leading to a ratings upgrade.