RBI dividend may cut fiscal deficit to 4.2% of GDP in FY26: SBI report

SBI says higher-than-budgeted dividend from RBI gives government room to lower FY26 fiscal deficit to 4.2 per cent of GDP or increase spending in key areas, amid strong liquidity and BoP outlook

A significant surplus transfer by the Reserve Bank of India (RBI) could help the Centre trim its fiscal deficit by 20 to 30 basis points (bps), potentially bringing it down from the budgeted 4.5 per cent to 4.2 per cent of GDP, according to a report by the State Bank of India (SBI).

 

In the Union Budget for 2025-26, the government had estimated a dividend income of ₹2.56 trillion from the RBI and public sector financial institutions. However, following the recent record transfer by the central bank, the actual inflow is expected to surpass this target significantly.

 

Fiscal space for deficit reduction or higher spending

 

SBI observed that this additional revenue enhances the government's fiscal flexibility. "We expect fiscal deficit to ease by 20 to 30 bps from the budgeted level to 4.2 per cent of GDP. Alternatively, it will open up for additional spending," the report stated.   

 

 

  Besides improving the fiscal math, the report noted that the higher-than-expected dividend would aid the government in managing the yield curve amid global economic volatility. It also contributes to strengthening the RBI’s Contingency Risk (CR) buffer, reinforcing its financial stability.

 

RBI surplus driven by market operations

 

The report attributed the higher surplus primarily to the central bank’s liquidity adjustment facility (LAF) operations and interest earnings from domestic and foreign security holdings.

 

The report further said that between June 3 and December 13, 2024, the RBI operated in absorption mode under LAF, indicating excess liquidity in the banking system. This trend shifted in mid-December, when the central bank began injecting funds, a stance it maintained until March 2025.

 

By March 31 this year, the system had swung back to a liquidity surplus, amounting to ₹1.2 trillion. During the December 16 to March 28 period, the average liquidity deficit was recorded at ₹1.7 trillion.   

 

Surplus liquidity likely to persist in FY26

 

Looking ahead, SBI anticipates that durable liquidity will remain in surplus through FY26. This projection is supported by expectations of open market operation (OMO) purchases, the substantial RBI dividend payout, and a projected balance of payments (BoP) surplus of $25–30 billion.

 

SBI concluded that the combination of strong dividend support and a favourable liquidity environment gives the government an opportunity to accelerate fiscal consolidation or channel funds toward key developmental initiatives.

 

(With ANI inputs)