India’s $24bn bonus from RBI gives it options on budget

Bloomberg

The Reserve Bank of India’s (RBI) record 1.76 trillion-rupee ($24.4 billion) payout to the government will give authorities more fiscal options, including possibly reducing its borrowing or boosting spending to spur economic growth.
The RBI’s board approved the transfer on August 26, which includes a dividend of 1.23 trillion rupees and 526.4bn rupees from its surplus capital. The dividend payment includes 280bn rupees already transferred to the government in February.
The transfer — which rivals the stimulus that some Group of 20 nations pumped into their economies during the global financial crisis — comes amid a slowdown in India’s growth to a five-year low, depressed consumer spending and reports of tens of thousands of job losses in the auto industry.
Finance Minister Nirmala Sitharaman has announced various measures to spur growth, including hastening the capital infusion into state-run lenders. At the same time, she’s trying to stick to a narrower fiscal deficit goal of 3.3% of gross domestic product for this year.
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, reports 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 country’s growth that’s decelerated to 5.8 percent in the three months to March.
Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc., estimate India has a tax revenue shortfall of 1 trillion rupees, or 0.5% of GDP.
“Gains from excess RBI dividends are likely to be utilized to bridge the revenue shortfall rather than engage in stimulus measures,” they said in a report.
Bonds rallied on the news of the RBI payout, with the yield on the benchmark 10-year security down four basis points to 6.44% after dropping 13 basis points at the market’s open.
The RBI pays dividends to government every year, based on profits from its investments and printing of notes and coins. A snapshot of its balance sheet is due on Friday, when central bank will release its annual report.
Over the past couple of years, the Finance Ministry has been seeking higher payouts from the RBI, arguing the central bank is holding more capital than it needs. It was a source of contention between the government and the former Governor Urjit Patel, who quit in December.
A panel, led by former Governor Bimal Jalan, was set up to study the central bank’s capital framework. Its recommendation, accepted by the RBI’s board on Monday, was that the central bank should hold realized equity of between 5.5% to 6.5% of its balance sheet, compared with the current 6.8%. The board decided to maintain the realized equity level at 5.5%, the central bank said.
The combined payout far exceeds the government’s budgeted estimate of 900 billion rupees as dividend from the RBI this year.