Global rating agency Fitch views the larger-than-expected Reserve Bank of India (RBI) dividend of Rs 2.1 lakh crore to the government, announced last week, as positive for India’s sovereign rating fundamentals.

“The larger-than-expected RBI dividend to the government should help to ensure the 5.1 per cent of GDP deficit target for the fiscal year ending March 2025 will be met and could be used to lower the deficit beyond the current target," Fitch Ratings said in a report on Monday.

The new government’s budget following the release of election results in June is likely to be presented in July and it will determine how the dividend will be used.

The government has signalled its aim to narrow the deficit gradually to 4.5 per cent of GDP by FY26. Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign rating fundamentals over the medium term, Fitch ratings said.

The RBI announced a record-high dividend transfer to the government equivalent to 0.6 per cent of GDP Rs 2.1 lakh crore from its operations in FY24. This is above the 0.3 per cent of GDP expected in the FY25 budget from February, so it will aid the authorities in meeting near-term deficit reduction goals. An important driver of higher RBI profits appears to be higher interest revenue on foreign assets, though the Central bank has not yet provided a detailed breakdown.

In its post-election budget, the new government has two alternatives. First, the government could opt to keep the current deficit target for FY25, and the windfall could allow the authorities to further boost spending on infrastructure, or to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment. Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1 per cent of GDP. The government’s choice could give greater clarity around its medium-term fiscal priorities, the Fitch report stated.

--IANS