MUMBAI The larger-than-expected dividend by the Reserve Bank of India to the government should help ensure the 5.1 per cent GDP deficit target for FY25 is met and could even be used to lower the deficit beyond the current target, according to Fitch Ratings.

“The government has signalled it aims to narrow the deficit gradually to 4.5 per cent of GDP by FY26. Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term,” the global agency said in a note.

The RBI announced a record-high dividend transfer of ₹2.1-lakh crore to the government for FY24, equivalent to 0.6 per cent of GDP. This is higher than the 0.3 per cent of GDP estimated in the February Budget for FY25.

Growth driver

An important driver of higher RBI profits appears to be higher interest revenue on foreign assets, though the central bank has not yet provided a detailed breakdown, Fitch said, adding that the proceeds will aid the government in meeting near-term deficit reduction goals.

India is currently undergoing national elections, the results of which will be declared on June 4. The new government’s budget is likely to be presented in July and will determine how the dividend will be used.

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“The new government has two alternatives. It could opt to keep the current deficit target for FY25, and the windfall could allow the authorities to further boost spending on infrastructure, or to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment. Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1 per cent of GDP. The government’s choice could give greater clarity around its medium-term fiscal priorities,” the note said.

Transfers from RBI depend on various factors, including the size and performance of assets held on the central bank’s balance sheet and India’s exchange rate, Fitch said, adding that potential volatility of transfers means there is “significant uncertainty about their medium-term path” and that it does not expect dividends as a share of GDP to be “sustained at such a high level”.