RBI approves 28,000 crore interim dividend to the government.

• RBI board approves ₹28,000 crore ($4 billion) as interim dividend

• This is the second straight year that RBI has announced an advance payment to the Narendra Modi government

The Reserve Bank of India (RBI) on Monday 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 RBI board, approved ₹28,000 crore ($4 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, RBI is emulating Turkey’s central bank that came to the aid of its government before municipal elections in March seen as a referendum on President Recep Tayyip Erdogan’s rule. The RBI dividend will help 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 ₹20,000 crore toward the first installment of the $10.5 billion programme by 31 March. The cash support—handing about 120 million farmers with up to 2 hectares (4.9 acres) three payments of₹2,000 per year—was Modi’s last attempt at reversing fortunes after his Bharatiya Janata Party (BJP) 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 central bank’s financial year runs from July to June.

The government has, in all, budgeted ₹74,140 crore in dividends from RBI and public sector banks in the year ending 31 March and has penciled in ₹82,910 crore for the next year.

Public standoff

The demand on 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 asked the central bank to transfer about ₹27,000 crore of surplus capital withheld by it in the previous two financial years. Separately, finance ministry officials estimate RBI has at least ₹3.6 trillion 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. (Source: livemint)