Macroscope: An assessment of RBI’s INR.57,128* crore dividend to government

The Central Board of the Reserve Bank of India (RBI) met today (August 14, 2020) under the Chairmanship of Shri Shaktikanta Das, Governor in the 584th meeting of the Central Board.
The Board reviewed the current economic situation, continued global and domestic challenges, and the monetary, regulatory, and other measures taken by RBI to mitigate the economic impact of COVID19 pandemic.

The Board also approved the transfer of ₹57128 crore as surplus to the Central Government for the accounting year 2019-20, while deciding to maintain the Contingency Risk Buffer at 5.5%.

The RBI largely earns profits through its trading of currencies and government bonds. Part of these earnings are set aside by the RBI for its operational and contingency needs, while the rest is transferred to the government in the form of dividend.

Has this happened for the first time?

No, RBI had approved the dividend multiple times in the past. List is as follows:

– INR.10,000 crores as interim dividend in FY18
– INR.28,000 crore as interim dividend in FY19
– INR.1.23 trillion as dividend and INR.52,640 crore from its surplus capital in August 2019

Key Takeaway:

To revive the economy, RBI, like 3 years past, filled the government’s bankrolled the govt., amidst a time when India is land-locked, not geographically, but economically.
The Dividend can lend some comfort to deteriorating macro conditions, in full-year GDP contractions after 4 decades, out-of-comfort inflation levels, and expanding deficit, courtesy of the relief packages.

From an investor’s perspective, this is the incubation phase before the goose lays the golden egg.
With the $5 Tn goal in mind and muscle, Govt. is striving-&-driving India to putting the pedal-on-themetal, via policies, encouraging credit flows, loan guarantees, etc. The results are already taking shape in rejuvenated FII flows, as they turn net-buyers after 4 consecutive months of inflows. Domestic investors, via record Demat accounts, and MF flows have followed suit too.

Investors must capitalise on the opportunity at hand and step up systematic plans to deploy capital into Indian equities to average cost at relatively lower levels so as to participate in a major part of the recovery cycle that has to follow. Continuing our stance on fixed income, investors may choose to ride the yield curve but avoid venturing ahead of short to medium terms –medium being the most aggressive; and though the situation continues to improve, avoid taking credit risk.

Click here If you want to read the complete RBI press release.