MUMBAI: Surplus liquidity in the banking system could reach Rs 6 lakh crore, with the Reserve Bank of India (RBI) expected to transfer a hefty dividend to the govt. Estimates for this dividend range between Rs 2.25 lakh crore and Rs 2.75 lakh crore. This payout, a significant boost to the Centre’s coffers, is expected to inject fresh liquidity into the banking system, raising surplus funds to between Rs 5.5 lakh crore and Rs 6 lakh crore.The RBI’s earnings this year were strong, partly due to income from deploying its large foreign exchange reserves in high-yielding US govt bonds and from selling dollars to stabilise the rupee. It also made gains from domestic bond holdings, which rose by Rs 1.95 lakh crore in FY25. The RBI’s active dollar sales to stabilise the rupee also contributed to its earnings. Gross dollar sales reached $371.6 billion in FY25 till Feb, up sharply from $153 billion the previous year.Foreign exchange reserves peaked at $704 billion in Sept 2024, with RBI estimated to have sold over $125 billion since then.
The sharp rise in liquidity could put downward pressure on short-term interest rates. “With the announcement of the RBI dividend this month, we expect banking liquidity to be approximately Rs 6 trillion,” said a note from Axis Mutual Fund.“Such high banking liquidity could lead to a rally at the short end of the curve.” Barclays also expects the surplus to expand further as the dividend reaches the system. “We anticipate system liquidity to improve further to Rs 5.5-6 trillion by end-May,” its analysts wrote. “This is likely to drag down the weighted average call rate (WACR) closer to the standing deposit facility (SDF) rate of 5.75%, amounting to effective easing.“The surge in liquidity could prompt the RBI’s monetary policy committee (MPC) to stay on hold at its June meeting, with policymakers likely to wait for clearer signals on inflation and growth. The RBI distributes dividends after setting aside funds for contingency provisioning. The amount of funds set aside for provisions depends on the size of the RBI balance sheet. Given the dip in the reserves, contingency provisioning is expected to remain slightly more than last year’s Rs 42,800 crore.The dividend amount is determined under the Economic Capital Framework, which stipulates a risk buffer of 5.5% to 6.5% of the RBI’s balance sheet.
