RBI Dividend to Boost Banking Liquidity in India

India’s banking system is likely to see a big rise in surplus liquidity, with estimates pointing to around ₹6 lakh crore. This increase comes after a large dividend payout from the Reserve Bank of India (RBI) to the government, according to a report by The Times of India (TOI). 

RBI’s Dividend to the Government 

The RBI is expected to give the central government a dividend between ₹2.25 lakh crore and ₹2.75 lakh crore. This will significantly help the government’s finances and inject more money into the banking system. 

This dividend is paid after the RBI sets aside some money as a safety buffer, called contingency provisions. These provisions depend on the size of the RBI’s balance sheet. Last year, the RBI set aside ₹42,800 crore. This year, the amount is likely to be higher due to a dip in reserves. 

How Did the RBI Earn More? 

The RBI’s strong earnings this year were driven by: 

• Returns from investing its foreign exchange reserves in high-yield U.S. government bonds 

• Selling U.S. dollars to control the value of the Indian rupee 

• Gains from domestic bond investments 

The RBI sold a record US$371.6 billion in FY25 (till February), compared to US$153 billion the year before. Although forex reserves peaked at US$704 billion in September 2024, over US$125 billion was sold afterwards. 

What This Means for the Banking Sector 

This extra money in the system could bring down short-term interest rates. Axis Mutual Fund said that liquidity is expected to reach ₹6 trillion (₹6 lakh crore). Barclays also expects liquidity between ₹5.5 and ₹6 trillion by the end of May. 

This could pull down the weighted average call rate (WACR)—the rate at which banks borrow from each other—closer to the standing deposit facility (SDF) rate of 5.75%. Experts say this situation is like an "effective easing" of interest rates. 

Conclusion 

With surplus liquidity rising sharply, banks will have more money available. While the RBI is likely to keep interest rates unchanged in its June policy, the dividend payout and strong liquidity could influence future decisions. 

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