06:36 AM EDT, 05/26/2025 (MT Newswires) -- The Reserve Bank of India announced a record surplus transfer of 2.68 trillion rupees for FY25 to the central government, noted Societe Generale.

This transfer not only surpassed the FY24 payout of 2.1 trillion rupees by 27%, but also exceeded the budget target of 2.56 trillion rupees that included the RBI's dividend and dividends from multiple state-owned financial institutions, as announced in February, wrote the bank in a note to clients.

While the increase may not be "substantial," it will provide much-needed relief to a fiscally constrained Indian government, stated SocGen. This move clearly illustrates that India's central bank isn't only fulfilling its primary role of using monetary policy to support growth, but is also acting as a fiscal policy enabler for the government.

While the RBI has yet to release its annual report, the reasons behind the higher surplus reported for FY25 haven't been fully determined, pointed out the bank. However, the record amount of US dollar (USD) sales is likely a major contributor to this unprecedented transfer.

While during the first half of FY25 the rupee (INR) traded within a narrow band, it experienced a significant depreciation between October 2024 and February 2025, primarily due to substantial foreign portfolio investor (FPI) outflows, added SocGen. The resultant strong intervention by the RBI, along with the widening gap between the historical purchase price of US dollar and the sales price, likely contributed to a significant increase in the RBI's earnings.

That said, what was "heartening" to note is a noticeable shift in RBI's risk provisioning framework, according to SocGen. It has adopted a flexible structure for determining its Contingent Risk Buffer (CRB) based on realized and projected macroeconomic volatility.

This is an improvement over the previous framework established by the Jalan Committee (2019), added the bank. As a result, the dividend payout to the central government that would be calculated as a residual will depend on the RBI's assessment of macroeconomic risks. The RBI revised the CRB upper limit to 7.5% of its total assets, up from 6.5%, and lowered the lower limit to 4.5% from 5.5%.

Given the relatively conservative approach, the actual dividend transfer by the RBI, while exceeding the official budget, fell short of the market expectation of at least three trillion rupees, noted SocGen. Nonetheless, this unprecedented transfer will provide the fiscally challenged government with some breathing space and help keep bond yields, which have already dropped to 6.2%, at a low level.

This will consequently lower borrowing costs for everyone, including the government, businesses and homebuyers, calculated the bank.

Regarding monetary policy, SocGen anticipates the RBI will announce four rate cuts in 2025, with two already implemented in February and April. Additionally, the bank doesn't rule out the possibility of another cut this year.