‘RBI dividend windfall unlikely to be fully used for fiscal consolidation’

Foreign banks do not expect the government to entirely direct the RBI’s record surplus transfer (dividend) of ₹2.1-lakh crore for 2023-24 towards further consolidation of its finances. 

There is a high probability that the RBI dividend bonanza would be part used by the Central government to offset higher spending commitments and the likely miss in disinvestment proceeds, said economists from such banks.

Fiscal bonanza

This substantial fiscal bonanza could prompt the government to choose to reduce fiscal deficit marginally when it presents the final budget for 2024-25 in June or early July. Technically, with this windfall of ₹2.1-lakh crore, the government can reduce the fiscal deficit for 2024-25 by as much as 0.3 per cent. 

Indications are that the government will leave some cushion for any unexpected shift on the revenue or expenditure side. 

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The Centre had in the interim Budget pegged the fiscal deficit target for 2024-25 at 5.1 per cent of GDP. 

“There is a higher likelihood that the dividend bonanza will be used partly to consolidate finances and remaining to offset the shortfall in few non-tax revenue heads. 

“While acknowledging the one-off nature of this scale of the transfer, which is more than two times the average of the last five years, we expect a larger push towards continuing to improve the quality mix of expenditure rather than channel towards populist measures,” Radhika Rao, Senior Economist, DBS Bank, told businessline. 

Rao was responding to a question on how she does the government using the dividend bonanza — as entirely a saving tool for fiscal consolidation or use the proceeds to fund additional expenditure. 

She said that better confidence on the fiscal consolidation path coupled with attractive returns and a strong macro story are likely to continue drawing in foreign portfolio investors’ (FPI) flows into bonds, ahead and after India’s inclusion into global fixed income benchmarks.

Indian government bonds are slated to be included in J P Morgan’s GBI-EM Index in June 2024 and Bloomberg Emerging Market index in January 2025. Both the inclusion is expected to result in flows of $25 billion into Indian debt in next 12 months.

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RBI’s surplus transfer

The Reserve Bank of India on Wednesday announced a record surplus transfer of ₹2.1-lakh crore (0.6 per cent of GDP) for 2023-24. This was more than budgeted ₹85,000 crore for 2023-24, last year’s ₹87,400 crore and exceeding market expectations of ₹1-lakh crore.

This dividend bonanza is a piece of good news from fixed income market standpoint as regards supply of bonds perspective, said economists. However, this is unlikely to immediately cause recalculation of government borrowing calendar and issuance of securities, they added.

Now that the government has got additional ₹1-lakh crore over the budgeted RBI dividend level, the budget math may have to be reworked to factor in this bonanza, they said.

Meanwhile, Rao said in a note, “Into this fiscal year, the government’s cash balance is already high on account of lull in spending in midst of the elections, strong revenue inflows, auctions and balance transfer from last year. 

To address this, the central bank has been conducting bond buybacks and a cutback in T-bill issuances”.

Against this backdrop, the focus is next on the full Budget (after the interim Budget was outlined in February) which will be tabled in early July to gauge if bond issuance is scaled back to accommodate the cash balance buffer, she added.