RBI: The Reserve Bank of India’s (RBI) board approved a surplus transfer to the government on Friday totaling 874.16 billion rupees ($10.69 billion), which was less than the market expectation of at least 1 trillion rupees. For the fiscal year 2023, the government has planned 480 billion rupees as a dividend from the state-owned banks and the central bank. In the fiscal year 2022, the RBI gave the government 303.07 billion rupees.
RBI’s Strong Dollar Sales and Treasury Holdings Drive Expectations of Surplus Transfer
Due to the profit the RBI generated from significant dollar sales and increased interest income on treasury holdings both domestically and abroad, analysts had expected the surplus transfer to significantly surpass budget predictions. Given that profits are determined based on the past cost of dollar purchases, economists predicted that the revenue from dollar sales would be significant. The RBI board also made the decision to increase the Contingency Risk Buffer from 5.50% to 6%.
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Contingency Risk Buffer Increase Leads to Reduced Transfer, Analysts Suggest
The decision to increase the Contingency Risk Buffer most likely resulted in a little reduced surplus transfer, according to Madhavi Arora, chief economist at Emkay Global. The fact that they would have suffered significant losses on their mark-to-market books for foreign securities, for which they had to make a significantly bigger provisioning from their earnings, offsets the possibility that they made bumper profits on FX sales, she added. However, due to market participants’ pricing in a surplus transfer of between 1 trillion and 1.5 trillion rupees, India’s benchmark 10-year bond yield increased by 5 basis points to 7.01%. “However, it could be too soon to predict with absolute certainty that the budget deficit will fall short of the objective of 5.9% of GDP. This is due to the fact that the sudden drop in inflation, namely the WPI inflation, suggests that the nominal GDP growth for FY24 may be lower than the 10.9% predicted in the Union Budget.
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