RBI dividend to government: The Reserve Bank of India (RBI), has announced a historic surplus transfer of Rs 2.11 lakh crore to the government for the fiscal year ending March, a figure significantly higher than both analysts' and government forecasts.

Government projections had initially earmarked a dividend of Rs 1.02 lakh crore from the RBI, state-run banks, and other financial institutions for the fiscal year 2024-25. However, the RBI's unprecedented surplus transfer far exceeded these estimates, dwarfing the previous year's transfer of Rs 87,416 crore.

According to Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, the surge in interest rates on both domestic and foreign securities, along with a substantial increase in the gross sale of foreign exchange and minimal impact from the central bank's liquidity operations, likely contributed to this "whopping dividend."

Bhardwaj expects that this windfall will help ease the fiscal deficit by 0.4 per cent in fiscal year 2024-25, providing relief to bond markets. Following the announcement, India's benchmark 10-year bond yield dropped to its lowest level in nearly a year, signalling market optimism.

In addition to the surplus transfer, the RBI board decided to increase the contingency risk buffer (CRB) to 6.5 per cent from 6 per cent previously, citing the economy's robust and resilient performance.

Gaura Sen Gupta, an economist with IDFC First Bank, noted that the higher dividend translates to additional fiscal revenue equivalent to 0.4 per cent of GDP, potentially leading to a fiscal deficit undershoot of 0.2 per cent of GDP in fiscal year 2024-25.

While analysts had initially anticipated a surplus transfer ranging from Rs 75,000 crore to Rs 1.2 lakh crore, the RBI's decision provides the government with substantial flexibility to manage welfare spending and sustain capital expenditure, even in the event of shortfall in disinvestment receipts.

However, Aditi Nayar, economist at rating agency ICRA, cautioned that while increasing funds available for capital expenditure would enhance the quality of fiscal deficit, additional spending may be challenging to incur within the remaining eight months of the fiscal year after the final budget presentation.

The budget announcement will likely occur post the conclusion of the ongoing election, scheduled to end on June 1 with counting on June 4. The budget date will be finalised once a new government is formed.

(With Reuters inputs)