Divided on dividends

To the Centre, currently is grappling with the difficult task of pump-priming the economy even while adhering to tight deficit targets, the Reserve Bank of India’s unexpected decision to slash its dividend payout to ₹30,659 crore must seem like an unkind cut indeed. The current year’s payout is 54 per cent lower than last year’s, and is well short of the ₹58,000 crore assumed in the budget calculations. The Government is said to be mulling a ‘dialogue’ with the central bank to see if the payout cannot be stepped up. However, the Centre should avoid treating the RBI as just another cash cow akin to the public sector undertakings, that can be tapped at will to balance its fiscal math. As risk manager to the economy, the central bank is tasked with managing the country’s foreign exchange reserves, ensuring stability in the financial markets and acting as a lender of last resort to the banking system. It is only fair that it gets to decide on the capital buffers it needs to cushion against these risks.

The sharp cutback in the RBI’s dividend payout in FY17 can be traced to a 24 per cent fall in its income, a 108 per cent jump in its expenses, and transfers to its contingency and asset development reserves. Both the decline in income and the spike in expenses are partly attributable to demonetisation-related costs — ₹17,426 crore towards interest on the Liquidity Adjustment Facility and ₹7,965 crore on note-printing. The only discretionary item is the decision to transfer ₹13,190 crore to contingency reserves. On this decision, admittedly, the RBI can be accused of ad-hocism as it had cited the Malegam committee’s recommendations to completely skip transfers to its reserves for the last three years. However, while the flip-flop can be questioned, the decision to shore up contingency reserves is prudent. The RBI’s contingency reserves exist to cushion it against unforeseen fluctuations in forex and gold reserves, losses on its exchange rate operations and systemic risks arising from its supervisory responsibilities. Today, with the RBI’s record forex reserves vulnerable to an appreciating rupee and an NPA-ridden banking system, neither of these risks can be ignored. In fact, expert committees have recommended that the RBI hold a minimum 12 per cent of its assets in contingency reserves. Its reserves in FY17, at 7.6 per cent, were well short of this number.

The friction between the RBI and the Centre on the annual dividend payout can be quite easily avoided through a publicly articulated distribution policy that binds both parties. Central banks are subject to clear quantitative obligations on dividend payouts, transfers to reserves or capital adequacy requirements, across many developing and emerging economies. Given that the RBI Act provides no clear guidelines on this, it is time the Government and the RBI thrashed out a mutually acceptable distribution policy as they did with the Monetary Policy Framework Agreement.

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