Dividend dependence

The Reserve Bank of India has handed the government a record surplus transfer of about Rs2.86 lakh crore – a windfall generated largely from profitable dollar sales during foreign exchange interventions. Some are dismayed that this amount falls short of the Rs3-lakh-crore-plus bounty that government economists were hoping for. Still, it represents the largest share of expected government revenue in more than two decades, with the exception of 2019-20.

But will the bumper payment be enough to keep India's fiscal deficit on target?  While opinion is divided on this issue, the debate over the RBI's growing role as a fiscal backstop can generate a longer-term credibility dimension that markets will not ignore indefinitely.

Some economists believe that this could generate an undercurrent of worry and markets may come to believe that fiscal discipline is being maintained through central bank transfers and other dividends, rather than genuine revenue generation or spending restraint. The credibility cost in the long run could eventually show up in bond yields and the currency.

Another talking point this year has been the RBI’s decision to lower its contingency reserve buffer (CRB) to 6.5 per cent from 7.5 per cent. The CRB is the internal reserve that the central bank maintains as a buffer against unforeseen risks. Critics have asked whether this represents a prudent risk. Arvind Panagariya, the pro-Modi economist, however, has played down this concern, arguing that the RBI’s credibility is ultimately tied to that of the government and not just its bal̥ance sheet buffers. “As long as the government is credibl̥e and solvent, the RBI will always remain solvent,” he says.

The scale of the transfer reflects the RBI's intervention activity over the past year, during which it sold dollars heavily to arrest the rupee's slide. Under the accounting framework applied to those sales, gains are calculated against the historical average price of the central bank's foreign exchange purchases, which sits well below the current dollar-rupee rate. The result is a large book profit that feeds directly into the surplus available for transfer to the government.

As a result, the Indian budget has quietly become accustomed to the support from the RBI. Over the past two years, the central bank’s dividend payments to the government have surged to unprecedented levels – from roughly Rs87,000 crore in 2022-23 to over Rs2.1 lakh crore in 2023-24, and then to about Rs2.7 lakh crore in 2024-25. In the Union Budget 2026-27, the Centre had pegged the dividend/surplus of RBI, nationalised banks and financial institutions at Rs3.16 lakh crore this fiscal and it is likely that this amount would be overshot once dividends are also paid by state-owned banks and financial institutions. But the fact remains that these transfers have become a silent tool for managing fiscal policy. The additional funds have helped keep India’s fiscal situation stable, reducing the budget deficit by nearly 0.2 per cent of GDP last year.

Exceptional market conditions

However, these windfalls are more the result of exceptional market conditions than steady fundamentals. As global conditions shift, will the government keep relying on these transfers? Even if a deal on Iran is reached, the disruption associated with Donald Trump’s rough-and-ready administration will continue.

Despite the size of the payment, many economists have expressed concern about the trajectory. Of late, the government has become too dependent on these transfers, which have grown 55-fold over two decades. 

Even if the RBI’s surplus has become a powerful yet unpredictable financial cushion, fiscal planners should not let down their guard. They should adopt a prudent approach, budgeting for a conservative dividend estimate and treating any upside as opportunistic capital. Rather than committing surplus funds to recurring subsidies or routine expenditure, these windfalls should be directed toward assets that appreciate over time and deliver long-term returns. This could include expanding logistics infrastructure, co-investing in strategic semiconductor or battery manufacturing, modernising railway corridors or supporting skill development programmes. Channelling one-off gains into such productivity-enhancing sectors not only strengthens the growth engine but also reduces the economy’s future reliance on unpredictable revenue streams.

Under rules revised from an original 2019 framework, the RBI is expected to maintain a contingency reserve equivalent to 4.5-7.5 per cent of its balance sheet, transferring any surplus above that band to the government. The reserve is held at the upper end of that range at 7.5 per cent.

But will it bail out the government? The fiscal arithmetic is already under strain from the Iran war. Higher crude oil prices are increasing India's import bill, the rupee has touched record lows, revenue growth is softening and the prospect of additional government spending to cushion the energy shock adds further pressure.

Subsidy burdens

A recent report by ratings agency ICRA says that the surge in global crude oil and natural gas prices amid the West Asia conflict is likely to complicate India's fiscal position in 2026-27, potentially increasing subsidy burdens and pressuring revenues. Of course, the government has since then partially hiked petrol, diesel and LPG prices to offset the impact.  But how much will that help? Crude prices have more than doubled from pre-crisis levels, raising input and logistics costs and disrupting supplies, including key fertiliser inputs. This could lift the government's fertiliser and LPG subsidy outgo, while weighing on corporate tax collections, refining margins and dividend receipts. Also, this may have direct implications for the fertiliser and petroleum industries, including the surge in input and logistical costs, reducing refining margins of downstream players, albeit augur well for upstream oil companies.

ICRA has said that the government may use the Economic Stabilisation Fund (ESF) to absorb part of the fiscal shock. The department of economic affairs had created a provision for an ESF in its revised estimates for 2025-26, allocating Rs50,000 crore under this head. Till the end of February 2026, hardly any amount from this fund had been used. It appears the Rs1 lakh crore allocation for the ESF will be managed by the department of economic affairs, as needed. Necessary provisions will be made through supplementary demands for grants to be approved by Parliament. This may be hailed as a sign of deft prudent fiscal management, but it nevertheless increases the pressure on government finances. While these buffers could help limit any major slippage from the fiscal deficit target of 4.5 per cent of GDP, risks will remain skewed to the upside if elevated energy prices persist due to a prolonged conflict, it adds.

ICRA believes that the ESF could be utilised to absorb a portion of the aforesaid revenue/expenditure shock to the government’s fiscal situation. Besides, the government can front-load subsidy pay-outs in H1 2026-27 and announce supplementary demand for grants later, if needed, that could be partly absorbed by the typical expenditure savings seen in recent years.

Upside risks

These buffers may prevent a large overshooting in the government's fiscal deficit target of 4.5 per cent of GDP (based on the GDP series of 2022-23), although sizeable upside risks could emerge if the ongoing conflict persists for a prolonged period, keeping crude oil and natural gas prices elevated, beyond our current baseline forecasts. Besides, ICRA expects that a modest upside to small savings collections in 2025-26 over the revised estimate (RE) will be carried forward to 2026-27, along with the typical expenditure savings of Rs1.8 lakh crore per annum on average seen during 2019-25, which would provide some buffer. If the conflict keeps energy prices elevated for a prolonged period, it would pose further upside risks to the Central government's 2026-27 fiscal deficit target.

Median poll forecasts put the fiscal deficit at 4.7 per cent of GDP for the current year, against the government's 4.3 per cent target, with some economists pencilling in a figure as high as 5 per cent, compared with last year's 4.4 percent outcome. But not all analysts take a uniformly critical view. Some point to genuine efforts by the government to improve the quality and composition of public spending alongside the balance sheet support provided by RBI transfers. But the broader message from the poll is clear: a record central bank dividend buys room, not resolution.

A transfer of Rs2.83 lakh crore would provide a near-term cushion for government finances but is unlikely to materially shift the rupee or bond market, given that the figure broadly matches the government's own budget forecast. The more significant market signal is the fiscal deficit trajectory: a print heading towards 4.7 per cent or higher would keep pressure on Indian government bonds and weigh on sentiment toward the rupee at a time when crude oil prices are already straining the current account.

When compared to the Budget estimates, the fiscal is expected to remain under pressure owing to expectations of higher fertiliser and fuel subsidy requirements and lower tax collections and OMC dividends, affirms Aditi Nayar, chief economist, ICRA. “While the ESF and customs duty hikes on gold and silver imports are likely to provide some cushion, we expect the government of India to exceed the budgeted fiscal deficit target for 2026-27 of 4.3 per cent of GDP by 40 bps, assuming an average crude oil price of $95/ barrel in the fiscal,” she explains.

“There will be a slippage in the fiscal deficit of 40-50 basis points of the GDP above the Budget estimate,” adds Madan Sabnavis, chief economist, Bank of Baroda. “The dividend won’t be adequate and the other measures will have to be taken by the government, probably on the expenditure side.”

In a webinar on 22 May on the Impact of the West Asia war on the Indian economy, the Bank of Baroda economists pegged the fiscal deficit at 4.7-4.8 per cent of the GDP in 2026-27 from 4.4 per cent in 2025-26. They also expect GDP growth to slow down to about 6.5-6.8 per cent this fiscal from 7.6 per cent last fiscal.

The Centre is expected to revisit the budget math later in the year with no clarity on when the West Asia conflict will end and the trajectory global crude oil prices will take. While indirect tax officials have indicated that there would be some hit on revenues from the tax relief measures, direct tax officials are hoping to strengthen revenue mobilisation. Meanwhile, the government lives on hope – and handouts.

Box

Put to better use?

Can the RBI’s dividend be put to better use? Theoretically, yes, if the government reallocates the windfall from general deficit reduction toward targeted capital expenditure (infrastructure) or human capital, rather than routine revenue spending. However, the central bank's transfers are highly unpredictable because the RBI’s annual surplus depends heavily on volatile global and domestic factors; economists caution against building permanent budgets around these. Instead, the debate on optimising the RBI’s dividend rests on three main avenues:

* Utilising the dividend to fund heavy infrastructure and long-term capital projects, rather than short-term consumption subsidies. This provides a higher multiplier effect on the economy.

* Using the windfall to retire existing public debt or significantly reduce gross market borrowings. Rating agencies closely monitor sovereign debt and using this money to actively lower the deficit could lead to an improved credit rating, which in turn lowers long-term borrowing costs.

* The RBI currently transfers its surplus to the Central government after topping up its ‘contingency risk buffer’ – which is maintained at a high 7.5 per cent (pared down to 6.5 per cent now) to protect the economy against external financial shocks. Allowing the RBI to retain a larger portion of these gains could enhance the central bank's financial resilience during geopolitical or currency crises.