A Windfall with Caveats: RBI’s Likely Record Dividend

India's fiscal policy has received a timely shot in the arm. The Reserve Bank of India (RBI) is expected to transfer a record INR 3–3.5trn to the central government this fiscal year (FY26), significantly higher than the INR 2.1 trn payout in FY25 and well above the budgeted INR 2.56 trn for FY26. While this windfall offers much-needed fiscal space, the underlying dynamics point to a more nuanced macroeconomic picture, particularly as tax collections show signs of softening.

The dividend, which stems from the RBI’s surplus income—including returns from foreign currency assets, interest earnings on securities, and forex market operations—comes at a strategically opportune moment. The bumper surplus is largely due to heightened forex intervention gains amid rupee volatility, and increased interest income on the RBI’s dollar holdings, supported by elevated U.S. yields. This non-tax windfall will provide the government with additional fiscal headroom—estimated to be 0.1% to 0.2% of GDP—which could prove critical in navigating both budgeted commitments and emergent fiscal pressures.

From a fiscal consolidation standpoint, this large transfer could play a crucial role in helping the government adhere to its FY26 fiscal deficit target of 4.4% of GDP, without compromising on capital expenditure plans or resorting to cuts in welfare allocations. With capital spending set at INR 11.21 trn (3.1% of GDP) and the Centre’s total expenditure budgeted at INR 50.65 trn, this buffer may prevent mid-year adjustments that typically disrupt implementation timelines and growth outcomes.

However, the more structural question is why this dividend matters more than usual this year. The answer lies in softening tax buoyancy. While the FY26 budget projected gross tax revenue growth of 10.8%, recent macro trends suggest tax collections may fall short, largely due to slowing corporate profitability, plateauing consumption, and subdued exports. Anecdotal evidence point to flatlining excise and customs receipts, and a moderation in direct tax growth compared to the high base of the post-pandemic rebound.

This emerging tax revenue shortfall is not entirely unexpected. In our earlier analysis of the FY26 Union Budget, we highlighted that the government’s decision to implement middle-class tax relief—including raising the tax-free income threshold to INR 1.2mn—would weigh on income tax inflows. Moreover, the continued rationalisation of customs duties—especially across sectors like automobiles, electronics, and critical minerals—though strategically sound for promoting competitiveness, further erodes near-term revenue prospects. Non-tax revenues, therefore, assume a disproportionately larger role in fiscal balancing.

Adding to fiscal complexity are heightened geopolitical tensions with Pakistan, following a spate of cross-border drone incursions and retaliatory military responses. Should tensions escalate further, the government may be forced to reprioritise budget allocations to defence, homeland security, and border infrastructure. Already, defence spending was raised to INR 6.81 trillion in the FY26 budget, but any sustained conflict or surge in national security requirements could derail planned fiscal targets. Emergency provisioning for strategic procurement, military logistics, or humanitarian responses could widen the deficit if offsetting revenues are not identified. The RBI dividend thus offers a temporary cushion, but may also be absorbed quickly in such a scenario.

Another risk is that the dividend bonanza may create incentives for fiscal complacency, especially ahead of politically sensitive state elections. With room to manoeuvre, the government may be tempted to expand populist schemes or increase subsidies rather than accelerating tax reforms or expenditure rationalisation. While increased allocations to social welfare, defence, or export promotion could be justified in the current geopolitical and economic context, the fiscal space created by one-off revenues should ideally be used to shore up buffers or fund productivity-enhancing investments.

While the RBI dividend eases pressure in the short run, it raises broader questions around the predictability and sustainability of non-tax revenue as a fiscal buffer. The central bank’s surplus is subject to global yield trends, currency volatility, and reserve management strategies—none of which offer certainty. Relying heavily on RBI transfers to balance the books can mask deeper structural issues, such as India’s chronically low tax-to-GDP ratio, which remains below 12%, lower than other large emerging economies. 

In conclusion, the RBI’s anticipated record dividend is a welcome but one-time gain. It will help the government manage its budgetary arithmetic and avert sharp fiscal slippages, particularly amid weaker-than-expected tax revenues. However, long-term fiscal credibility hinges on broadening the revenue base, improving tax compliance, and ensuring productive deployment of public funds. As Fitch Ratings noted in its February 2025 outlook, India’s medium-term debt trajectory depends on sustaining fiscal discipline even when windfalls arrive. This moment, therefore, is not just an opportunity to spend more—but a chance to spend smarter.