India central bank to pay early 280b rupees in dividend to government

[NEW DELHI] India's central bank approved an early transfer of a part of its profit to the government, which is desperate for cash to fund populist pledges ahead of a national election.

The Reserve Bank of India's board, approved 280 billion rupees (S$5.31 billion) as interim dividend, according to a statement. This is the second straight year that the RBI has announced an advance payment to Prime Minister Narendra Modi's government.

In approving the measure, the RBI is emulating Turkey's central bank that came to the aid of its government before municipal elections seen as a referendum on President Recep Tayyip Erdogan's rule. The RBI dividend will help Mr Modi's government partly bridge a budget gap and could be key to funding an income support programme for farmers ahead of a national vote due by May.

The government needs cash after allocating 200 billion rupees toward the first installment of the US$10.5 billion program by March 31. The cash support - handing about 120 million farmers with up to 2 hectares- comes in three payments of 2,000 rupees per year - was Mr Modi's last attempt at reversing fortunes after his Bharatiya Janata Party lost control of three key states in regional elections in December.

The transfer is "based on a limited audit review and after applying the extant economic capital framework," the central bank said in a statement. The RBI's financial year runs from July to June.

The government has, in all, budgeted 741.4 billion rupees in dividends from the RBI and the state-run lenders in the year ending March 31 and has penciled in 829.1 billion rupees for the next year.

"This should keep fiscal deficit at indicated target," Shubhada Rao, chief economist with Yes Bank Ltd, said, referring to the government's revised budget gap goal of 3.4 per cent of gross domestic product for the current fiscal year. The money would also help fund the farm income support program's first installment, she added.

The demand on the RBI for more dividends and to part with a greater share of its capital has been a contentious issue between the central bank and the government. It resulted in a public standoff last year and is seen as one of the reasons for the abrupt exit of then Governor Urjit Patel.

The finance ministry has also asked the central bank to transfer about 270 billion rupees of surplus capital withheld by it in the previous two financial years. Separately, finance ministry officials estimate the RBI has at least 3.6 trillion rupees more capital than it needs, which they say can be used to help bolster weak Indian banks.

However, a recent study by the Centre for Advanced Financial Research and Learning, a Mumbai-based think tank, showed the central bank has insufficient capital, and much less a surplus to hand over to the government.

BLOOMBERG