RBI Dividend: The Lifeline for the Centre and Markets

Over the last few years, the RBI’s dividend to the Central government has become a significant event for the fixed income markets. This is because the RBI dividend now accounts for 7% to 8% of total Central government revenues. The fiscal room created by the RBI dividend has enabled the Centre to consolidate the fiscal deficit and focus on capital expenditure. For instance, in 2025-26, the Central government fiscal deficit has likely reduced to 4.5% of GDP from 4.9% in 2024-25. The higher RBI dividend has accounted for more than 25% of the fiscal consolidation during the year.

In 2026-27 as well, the RBI dividend remains significant, reaching a fresh historical high of ₹2.9 trillion, or 0.7% of GDP. This dividend has been generated on a balance sheet size of ₹92 trillion as of March 2026, representing a ROA of 3.1%, which is higher than most scheduled commercial banks. While it may not be fair to compare banks with the RBI, as the former face restrictions such as SLR, CRR, and LCR, it shows the efficiency with which the Central Bank has managed a volatile global environment. RBI’s income, before provisioning and profit transfer, grew by 26% in 2025-26 versus 24% in 2024-25.

A large part of the profit has been generated by interest income on the RBI’s holdings of foreign currency assets and government securities. Indeed, the majority of the RBI’s balance sheet is dominated by foreign currency assets, which account for 58% of total assets. Most of these assets are held in the form of foreign securities, such as US Treasuries, while around 16% is held as deposits with multilateral organizations. Meanwhile, the RBI’s holdings of government securities, mostly G-secs, account for 25% of total assets.

The share of domestic securities has risen, while that of foreign securities has fallen in 2025-26. This reflects the fact that the RBI has been a net seller of dollars over the last two years due to a negative Balance of Payments. Moreover, the RBI has undertaken an unprecedented ₹8.8 trillion in OMO purchases to infuse liquidity in 2025-26.

The RBI’s balance sheet has risen to 26.6% of GDP as of March 2026 versus 23.7% as of March 2025. A large part of this increase is due to revaluation gains on foreign currency assets and gold reserves. In 2025-26, the rupee depreciated by 11%, compared to the usual depreciation of 3% per annum. As the balance sheet is denominated in rupee terms, the weaker currency implies that the value of foreign currency assets rises when converted into rupee. Moreover, gold prices jumped by 50% in 2025-26, which increased the value of gold reserves. A secondary factor behind the rise in the RBI’s balance sheet has been the OMO purchases undertaken by the central bank.

The dividend is broadly in line with what has been pencilled into the 2026-27 Union Budget. Hence, it does not provide extra fiscal space to the Centre at a time when it faces considerable fiscal slippage risks. The West Asia crisis will result in higher subsidy expenditure—fertilizer and LPG—as well as revenue foregone from excise duty cuts on petrol and diesel. The risk to the Centre is estimated at 0.4% of GDP or ₹1.6 trillion. Part of this additional financing requirement would be met via extra borrowing.

From a liquidity perspective, the RBI dividend is a significant infusion that will percolate into banking system liquidity over one to two months, depending on the pace of government expenditure. This will provide the RBI temporary respite from having to infuse liquidity via OMO purchases.

However, the surge in liquidity surplus will last for a brief period, given the significant pace of currency leakage and the drain from the RBI’s dollar selling. In the second half of 2026-27, the RBI will need to resume OMO purchases to ensure that banking system liquidity does not become too tight. We estimate total durable liquidity infusion needs of ₹7 trillion in 2026-27. This will counter the drain from cash withdrawals, which is estimated at ₹4.6 trillion in 2026-27, and the drain from the RBI’s FX intervention, estimated at ₹4 trillion.