Forex gains, bond earnings drove RBI's record dividend payout: Bank of Baroda report
New Delhi, May 22
The record dividend announced by the Reserve Bank of India to the central government for the financial year 2025-26 was largely driven by "revaluation gains on foreign exchange reserves" and higher earnings from government bond holdings, according to a research note by Bank of Baroda economist Dipanwita Mazumdar.
The RBI on Friday announced a surplus transfer of Rs 2.87 lakh crore to the government for 2025-26, higher than the Rs 2.68 lakh crore transferred in the previous financial year.
Explaining the reasons behind the higher payout, the report said, "The higher surplus can be attributed to revaluation gains on forex reserves."
In simple terms, the RBI benefited from the sharp rise in the dollar against the rupee over the years. Since the central bank holds a large amount of foreign exchange reserves, mainly in dollars, the value of these reserves rises when converted into rupees as the dollar strengthens.
"The current INR/USD rate is also higher than historical averages, hence the valuation gains is attributing to higher surplus," the report added.
The report also said the RBI earned more income from government securities, or bonds, during the year.
"The other part may be due to interest earning on holding of rupee securities, due to record high OMO purchase by RBI in FY26," the note said.
OMO, or Open Market Operations, refers to the RBI buying government bonds from the market to inject liquidity, or cash, into the banking system. When the RBI buys these bonds, it also earns interest income on them.
According to the report, the RBI carried out its highest-ever purchase of government securities in FY26 to support liquidity in the economy.
"RBI has done highest OMO purchase in FY26 to support durable liquidity," the report noted.
The note said the higher dividend is positive for the government's finances at a time when global geopolitical tensions and elevated crude oil prices are putting pressure on government spending.
"The higher surplus is positive in terms of maintaining the targeted fiscal deficit, especially at a time when elevated geopolitical risks have caused a pressure on exchequer," the report said.
Fiscal deficit refers to the gap between the government's expenditure and revenue. A higher dividend from the RBI gives the government additional non-tax income and reduces pressure on borrowing.
However, the report noted that the record dividend payout has not significantly eased bond market concerns, with India's benchmark 10-year government bond yield likely to remain above 7 per cent amid geopolitical tensions and war-related uncertainties.
"We expect stickiness in yields to continue unless war situation reverts to normalcy," the report added.
The RBI's balance sheet, which reflects its total assets and liabilities, expanded by 20.6 per cent to Rs 92 lakh crore in March 2026 from Rs 76.3 lakh crore a year ago, the report noted.
The report further said the RBI maintained its contingency risk buffer -- funds kept aside for emergencies and financial risks -- at 6.5 per cent of the balance sheet.
— ANI
Reader Comments
Interesting how the dollar-rupee fluctuation actually helps us in this case. The RBI's forex reserves are appreciating in rupee terms because dollar is stronger. But I worry about the common man struggling with inflation - will this dividend trickle down? 😕
Record OMO purchases by RBI injecting liquidity into the system is a smart move. But interest rates still high, and bond yields above 7% show market isn't fully convinced. Geopolitical tensions are the real spoiler here. Hope things normalize soon.
Great that RBI maintains 6.5% contingency buffer - shows responsible management. But honestly, as a taxpayer, I want transparency on how this ₹2.87 lakh crore will be used. Will it fund infrastructure or just plug revenue gaps? Need clear budget allocation.
The report mentions elevated crude oil prices and geopolitical tensions hurting our exchequer. This dividend is indeed a breather for the government. But I wish they focused more on controlling oil prices and strengthening rupee long-term rather than relying on one-time gains.
Interesting economic analysis from India. The link between forex reserves valuation and government dividend is clever. But as an observer, I wonder if this is sustainable - relying on dollar strength for revenue seems risky. India needs more structural fiscal reforms.
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