RBI fund transfer: Govt's focus to be on higher capex spend over personal-consumption stimulus, says KIE

The excess funds with the government will also be good news for the bond market, the brokerage report said.

With the central bank transferring Rs 2.1 trillion to the government, brokerage Kotak Institutional Equities expects the government to focus on higher capex and fiscal consolidation over any stimulus for personal consumption through tax cuts.

On May 22, the board of Reserve Bank of India (RBI) approved what is arguably the highest-ever yearly surplus transfer made to the government by the central bank.

In the economy report issued after the central bank's announcement, the brokerage's analysts wrote that this "bumper transfer" gives the government two choices, of either faster pace of fiscal consolidation and/or higher spending and/or lower taxes.

While adhering to the fiscal-consolidation path now becomes easier, the transfer gives the government space to alter its budgeted receipts and expenditure, the analysts noted.

In this scenario, they expect the government to focus more on capex spending than taking any measure to boost private consumption through more direct measures.

They wrote, "The government can continue with its capex thrust by increasing allocations to roads, railways and defense (from their single-digit growths over FY2024RE). There is also room for the government to lower personal income taxes to boost consumption at the lower end of the tax pyramid. We expect the government to focus on higher capex and fiscal consolidation over any stimulus through tax cuts.

The transfer money itself seems to have stemmed mainly from two sources for RBI--large interest income earnings on foreign and domestic holdings and FX sales operations by the central bank-- according to the analysts.

The excess funds with the government will also be good news for the bond market, the report said.

Also read: Higher RBI dividend to help ease fiscal deficit by 0.2-0.4% in FY25, say economists

They wrote, "We estimate the government’s cash balance to have surged to around Rs 6 tn this week (including the RBI transfer). We expect the comfortable fiscal position and surplus cash balances to provide room for further buybacks, thereby reducing the net G-sec supply, and further improving demand-supply dynamics."

They added, "We expect liquidity conditions to improve from 2QFY25, led by (1) revival in government spending, (2) seasonal payback in currency in circulation and (3) likely RBI intervention to manage FPI debt flows. Although domestic factors are very conducive for a rally in bonds, we remain watchful for the possibility of sterilization of the FX intervention and upside to global yields, amid further delays in the US Fed rate cycle."