On November 17, 2021, a young man walked through the entrance of the Reserve Bank of India headquarters in Mumbai. The benchmark 10-year Treasury bond yield hit its highest level in three years.
Puneet Paranipet | AFP | Getty Images
India’s central bank board approved transferring a record 2.11 trillion rupees ($25.3 billion) surplus to the government for the fiscal year ended in March, well above analysts and government forecasts.
The mid-term budget estimate for the financial year 2024/25 shows that the government has budgeted Rs 1.02 trillion in dividends from the Reserve Bank of India, nationalized banks and other financial institutions.
In FY23, the RBI transferred Rs 87,416 crore to the government.
Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said rising domestic and foreign securities rates, a significant increase in gross foreign exchange sales and a modest impact from the central bank’s liquidity operations could lead to such a “huge dividend” .
“We expect this windfall to help reduce the fiscal deficit by 0.4% in FY25. The lower borrowing band announced in the upcoming budget will provide significant breathing space to the bond market,” she added.
After the news was announced, India’s benchmark 10-year government bond yield fell 5 basis points to 6.99%, the lowest level in the past year.
The bank’s board of directors reviewed the global and domestic economic situation, including risks to the outlook, the statement added.
The RBI board also decided to increase the Emergency Risk Buffer (CRB) to 6.5% from the previous 6% as the economy remains strong and resilient.
“The higher dividend represents additional fiscal revenue of 0.4% of GDP,” IDFC Bank One economist Gaura Sen Gupta wrote in emailed comments.
“Given the potential shortfall in disinvestment revenue and a more modest tax increase than budgeted, the fiscal deficit in FY25 is likely to be 0.2% of GDP lower than budgeted estimates,” Sen Gupta wrote.
Analysts had expected the surplus transfer amount to be between 750 billion rupees and 1.2 trillion rupees.
“This gives the government huge scope to manage any welfare spending and sustain capital spending even if disinvestment revenue falls short,” said Garima Kapoor, economist and senior vice president at Elara Capital.
Aditi Nayar, economist at ratings agency ICRA, said increasing funds available for capital expenditure will improve the quality of the fiscal deficit, but it is likely to be limited in the remaining eight months of the fiscal year after the final budget is presented. It is difficult to incur additional expenses.
India is currently undergoing a marathon election, which will end on June 1st and is expected to end on June 4th.
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