In all likelihood, surplus from RBI will act as cushion against a possible shortfall in revenue collection in FY20 and not as a growth booster
The Reserve Bank of India’s central board has accepted Bimal Jalan committee's recommendations and approved a surplus transfer of Rs 1,76,051 crore to the Government of India. The RBI will pay a dividend of Rs 1,23,414 crore (~$17 billion) for 2019-20, along with a one-off payment of Rs 52,637 crore ($7.3 billion) as excess provisions identified under the revised Economic Capital Framework (ECF) recommended by the panel.How could RBI manage to pay such a huge dividend?
The announced transfer for FY20 includes an all-time high dividend/surplus from the RBI in recent history. The general surplus/dividend distribution from the central bank is based on total economic capital, which stood at 23.3 percent of balance sheet as of June 30, 2019. Since RBI’s economic capital was within the range of 24.5-20 percent of balance sheet as prescribed by the framework, the entire net income of Rs 1,23,414 crore for 2018-19 will be transferred to the government. But what explains the high income of the RBI for FY19?
The details of the same are not yet available. But huge trading revenues could be attributed to many OMOs (open market operations) conducted by the RBI which amounted to almost 70 percent of total government borrowing in FY19 and could have boosted the income.
How much is the windfall gain for the government?
Given that the RBI has already paid an interim dividend of Rs 28,000 crore to the government, net amount transferrable will be around Rs 1,48,000 crore. For 2019-20, the government had already budgeted dividend of Rs 90,000 crore from the central bank. This implies a clear windfall gain of Rs 58,000 crore ($8 bn) or about 0.3 percent of GDP in FY20.
Undoubtedly, the fiscal position improves materially post RBI announcement on August 26. However, impact of this windfall fiscal gain on the economy largely depends on how government decides to utilise the fiscal bonanza.
There is a distinct slowdown in the economy which can be attributed to tighter funding conditions, a sharp decline in consumer confidence, a negative central government fiscal impulse as well as global headwinds. The policy response so far to mitigate the current slowdown has been mainly in the form of monetary action wherein policy rates have been reduced four times by 110 bps from August last year till date. The government has exercised restraint in easing fiscal policies. Despite the slowing economy, the FY20 Budget did not envisage any additional stimulus through the reported fiscal deficit figures, with the FY20 targeted fiscal deficit almost flat at 3.3 percent of GDP, compared to 3.4 percent for FY19.
The current slowdown seems more extended compared to previous episodes of growth deceleration seen during demonetisation or in 2013 following the taper tantrum. Hence, the government could utilise this amount for specific expenditure outlays. If the government chooses to do so, it will have a direct positive impact on growth and also create some inflationary pressure. It is worth noting that if the government decides to spend the amount to support growth, it will be first big push through fiscal stimulus during the last decade. In 2009 after the global financial crisis, the government had spent $6.5 billion, which was equivalent to 0.5 percent of the 2008 GDP, according to IMF.
In an alternative scenario, the government might not spend the windfall gain to propel growth. It could do so because given the slowdown, there is significant downside risk to tax collections. In such a scenario, the surplus from the RBI should help offset the expected shortfalls in various tax revenues in 2019-20 and aid the government in meeting its fiscal deficit target.
In all likelihood, surplus from the RBI will act as cushion against a possible shortfall in revenue collection in FY20 and not as a growth booster.Why should the market rejoice?While a lot depends on the manner of utilisation of excess proceeds, the surplus gain from the RBI is still positive news for equity markets. The surplus of Rs 58,000 crore can help the government tide over any future revenue shortfall implying that risk of fiscal slippage has reduced considerably. The lower risk of additional borrowing by the government will fuel further rally in G-secs with yield on 10-year GoI bond trending downwards.
Low yield augurs well for financial stocks, especially wholesale funded NBFCs. With yields falling, wholesale funded top-rated NBFCs will make some savings on refinancing, and incremental cost of funds will decline.
Post liquidity crisis, yields have come off by around 170 bps from October 2018 till date and going forward also, we see downward bias in bond yields given benign inflation, slowing domestic growth and accommodative monetary policy. And now the lower risk of fiscal slippage only adds to positive outlook for bond yields.
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