The Reserve Bank of India (RBI) has announced that it will be transferring a hefty dividend sum of ₹50,000 crores to the Indian government as part of the Union Budget provisions. This significant transfer marks the highest amount to be recorded since the fiscal year of 2015-16. The generated funds, in this case, are expected to create ample space for the government to boost capital inflows into the struggling public sector banks.
Recap of Previous Financial Measures
Back in October 2017, the government had outlined plans to inject ₹2.11 trillion into the public sector banking system to help alleviate financial stress. The strategy for achieving this was through a mix of recapitalization bonds valued at ₹1.35 trillion, direct cash infusion from budgetary allocations to the tune of ₹18,000 crores, and market borrowing estimated at ₹58,000 crores.
Understanding Key Financial Terms
It’s worth noting a few key terminologies in this context. Dividend is a term referring to a monetary or non-monetary reward that a company offers to its shareholders. Dividends can be provided in several forms, including cash payments, stock offerings, or any other vehicle. On another hand, Recapitalisation bonds are special bonds, issued under government directives, with the primary purpose of infusing capital into crisis-stricken Public Sector Banks (PSBs). Lastly, Market Borrowing refers to the scenario where a government issues securities, bonds, and bills to bridge the gap between its revenue and expenditure.
The Central Bank’s Financial Health Post-Demonetization
For the fiscal year 2017, the RBI had to settle with a lower surplus transfer to the government. This situation resulted from the enormous costs the central bank had to bear in the aftermath of the demonetization initiative. As per the RBI Act of 1934, the central bank is obligated to pay the government its share of surplus after accounting for bad & doubtful debts, asset depreciation, and contributions to staff and superannuation fund, among other considerations.
The Economic Survey’s Perspective
The RBI is revered as being among the most highly capitalized central banks globally. Transferring excess capital from the RBI to the government can lead to improved productivity. The government can utilize this surplus to recapitalize public sector banks and ameliorate the overall fiscal position. However, while this exercise can potentially uplift the financial ecosystem, there’s also a looming concern that this practice should not compromise the independence of the central bank.