India Economy: RBI transfers to make budget figures realistic

27 Aug 2019

RBI announced a total transfer of Rs1.48tn to the government for FY20. This represents Rs420-580bn in excess dividends, compared with the budgeted figure by the government for FY20. Even after this transfer, the RBI remains one of the healthier central banks in the world with a total capitalization of 23% of the balance sheet and the Contingency Risk Buffer at the lower end of 5.5% from 6.8% (6.5-5.5% range is the prescribed level).

The excess dividends of Rs420-580bn translates to 22-31bps of GDP, which can be used to bridge the possibility of a shortfall in tax revenues growth. The decline in tax revenues growth can be to the extent of 17% from a budgeted 20% yoy (tax buoyancy would still be more than 1). Thus, the fiscal math looks a lot more achievable following this transfer.

Our base case is that the government remains disciplined on fiscal targets with this more credible math, we should see a further rally in Gsec yields (10-year yields at ~6.5%). Even after these transfers, the fiscal deficit (including off-balance sheet) should be at 5.4%, similar to FY19. Bond proxies (such as NTPC) and PSU banks on treasury (SBI) could benefit from this.

If the government chooses to convert the transferred sum into a higher spending, we believe it would tilt more in favor of infrastructure spending rather than consumption. Overall, this event should support markets in the short term due to additional support from the RBI to the government.

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