After huge RBI dividend, low fisc deficit will help ratings: Fitch

India’s sovereign rating fundamentals would stand to gain from sustained reduction in fiscal deficit over the medium term, Fitch Ratings noted on Monday, especially if “underpinned by durable revenue-raising reforms”.

“The larger-than-expected Reserve Bank of India (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 (FY25) will be met and could be used to lower the deficit beyond the current target,” said Fitch Ratings, referring to the record surplus dividend of Rs 2.11 lakh crore that the RBI transferred to the government last week.

“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 stated. According to Fitch, higher interest revenue on foreign assets has been a significant reason for the central bank’s higher profits, although the RBI has not officially released any details on the matter.

A clear picture on how the new government plans to use the RBI largesse would only emerge with the post-election budget in July, especially as far as the government’s medium-term fiscal priorities are concerned. Finance minister Nirmala Sitharaman has in the past suggested bringing down the fiscal deficit to 4.5 per cent by FY26.

The new government could act in one of two ways as far as the RBI’s dividend of Rs 2.11 lakh crore is concerned. The government could maintain the present deficit target of 5.1 per cent for FY25, too, and utilise the funds on infrastructure. Or, the government could save the entire or most of the dividend so that the fiscal deficit can be brought down below 5.1 per cent of the GDP.