RBI's surplus transfer sparks hope for reduced govt borrowing by Rs 1 trn

The Reserve Bank of India’s (RBI’s) record surplus transfer to the government has raised hopes among bond traders that the government might reduce its gross borrowing for the current financial year (2024-25/FY25) by up to Rs 1 trillion.

The RBI approved a dividend of Rs 2.11 trillion for the central government for 2023-24, marking an increase of roughly 141 per cent from 2022-23 (FY23). In addition, the contingency risk buffer has been raised to 6.5 per cent from the previous 6 per cent.

Consequently, the yield on the benchmark government bond fell below the psychologically crucial 7 per cent mark on Wednesday. The benchmark yield settled at 6.99 per cent, down from 7.04 per cent on Tuesday.

The surplus transfer surpassed the Rs 1 trillion that most traders had anticipated. Last year, the RBI transferred Rs 87,416 crore to the government as its surplus.

The Interim Budget for FY25 estimated the government’s income from the RBI and state-owned bank dividends at Rs 1.02 trillion.

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“The dividend is 107 per cent higher than the Budget Estimate of Rs 1.02 trillion and 142 per cent higher than the FY23 dividend of Rs 87,416 crore. This could lead to lower government borrowings in FY25 than estimated. If this is the case, then lower bond yields would support the market, or the government may look to increase capital expenditure, which would, in turn, support growth. Overall sentimentally, the development is positive for equity markets,” said Rahul Malani, research analyst at Sharekhan.

Bond market participants are now focusing on the monetary policy meeting in June to assess the central bank’s liquidity stance.

“The other aspect is how the RBI manages this liquidity and liquidity stance in the next policy. If the stance continues as ‘withdrawal of accommodation’ in the next policy, the RBI may use other tools, including open market operation sales and foreign exchange interventions, to absorb liquidity,” said V R C Reddy, head of treasury at Karur Vysya Bank.

Traders now expect the benchmark yield to fall to 6.75 per cent by the end of June, bolstered by foreign inflows via JP Morgan bond index inclusion starting in June.

Traders have been investing in the most liquid bond, which is the 10-year benchmark bond, reflecting a cautious approach amid uncertainties.

In the meantime, the RBI has been taking measures like buybacks and supply cuts to steepen the yield curve, which is almost flat.

The RBI issued an updated calendar for treasury bills for the period from May 22 to June 26 of the current year, which includes a reduction of Rs 60,000 crore in the issuance amount.