Government weighing options on using RBI payout

Mumbai: The rupee rose sharply against the US dollar while bonds climbed for a second day on hope that the higher than estimated surplus transfer by the central bank to the government would ease fiscal and current account deficit concerns.

The government is also expected to announce more measures this week to support economic growth.

The rupee gained 0.75 per cent, or 54 paise, from Monday's close of 72.02, ending at 71.48. Also, optimism over signs of easing of trade tensions between the US and China supported the rupee.

The benchmark bond yields rose by 5 basis points to 6.53 per cent while the equities pared most of the early gains in the afternoon trading session. Bond prices and yields move in opposite direction.

The RBI on Monday announced the highest ever dividend transfer of Rs 1.76 lakh crore to the government, which analysts believe could help the government to stimulate the economy without fiscal slippage. The RBI's central board approved the payout, which includes Rs 1.23 lakh crore as dividend for the year 2018-19 and Rs 52,637 crore as surplus capital. Of the annual dividend amount of Rs 1.23 lakh crore, Rs 28,000 crore has already been paid out in February. Thus, the effective annual dividend transfer minus the surplus capital to the government stands out is around Rs 94,000 crore for FY20.

The FY20 payout rivals the stimulus that some Group of 20 nations pumped into their economies during the global financial crisis.

Analysts believe the payout will give authorities more fiscal options, including possibly reducing its borrowing or boosting spending to spur economic growth.

A Bloomberg report, citing sources, said the Finance Ministry is keen to use the transfer to cut its budgeted borrowings rather than fund a stimulus package, though it’s yet to make a final decision on how to spend the amount.

Finance Minister Nirmala Sitharaman said the ministry hasn’t yet decided on the end-use of the money from the RBI. A decision will be communicated when it’s made, she said.

The government could cut its planned borrowings if it uses the funds to plug a revenue shortfall in its budget, helping Sitharaman keep the deficit under control. Or it could use the money to finance new spending, like a stimulus package, to help lift growth that’s decelerated to 5.8 per cent in Q4 FY19.

Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc, estimate India has a tax revenue shortfall of Rs 1 lakh crore, or 0.5 per cent of GDP.

“Gains from excess RBI dividends are likely to be utilised to bridge the revenue shortfall rather than engage in stimulus measures,” they said in a report.

Shubhada Rao, Chief Economist at Yes Bank, said, “The announcement of record dividend coupled with earmarking of additional capital for the government allays fears of a potential slip in fiscal deficit and increase in market borrowing in FY20. This reinforces the message of adherence to the fiscal target, as enumerated by the Finance Minister last week, who managed to skillfully craft a stimulus design without endangering the fiscal arithmetic.”

"On the other hand, the transfer of excess capital could potentially get offset by lower OMO purchases from the RBI to balance out the expansion in domestic assets," said Rao.

"From a medium-term perspective, we note that the choice of fixing contingent risk buffer at the lower end of 5.5 per cent by the Central Board of the RBI leaves little room for future transfer of excess capital as growth in balance sheet in FY21 and beyond would require additional need for provisioning. Hence, room for any continued transfer of excess capital cannot be guaranteed. This could weigh upon bond market sentiment as they would be inclined to treat the current transfer of excess capital as a one-time gain," added Rao.

Abhishek Gupta, India Economist at Bloomberg, said the transfer of Rs 1.76 lakh crore should offset any revenue shortfall for the government from lower tax buoyancy amid slower growth this year, allowing more room to boost spending. It will also make it easier for the government to meet its budget deficit target of 3.3 per cent of GDP for this fiscal.

Samiran Chakraborty and Baqar M Zaidi, analysts at Citigroup Inc., said the government had two options: it can immediately spend part of the amount to stimulate the economy or it can wait for some clarity to emerge on the potential revenue shortfall before spending the money.

Since the government has shown “stellar resolve” in maintaining” fiscal targets, “our bias is to think that the government will follow the latter approach,” they wrote in a note.

Sitharaman said last week the government will immediately inject Rs 70,000 crore of fresh capital into public sector banks to spur lending.

The windfall will probably be pumped into banks, which should help reduce lending rates, Bank of America Merrill Lynch economists Indranil Sen Gupta and Aastha Gudwani said in a note. That would be a “game changer” for the economy, they said.