RBI’s Record Surplus Transfer May Not Be Used For Fiscal Stimulus, Say Brokerages
An Indian 500 rupee, bottom, and a 2,000 rupee banknotes are arranged for a photograph in Thailand. (Photographer: Brent Lewin/Bloomberg)

RBI’s Record Surplus Transfer May Not Be Used For Fiscal Stimulus, Say Brokerages

The Reserve Bank of India’s record transfer of a surplus to the government is unlikely to result in a fiscal stimulus, against expectations, as India strives to meet fiscal deficit target for 2019-20, according to analysts and brokerages.

“While there are reports that the government may use this surplus to declare additional fiscal stimulus in reaction to sagging growth, we believe the space for this is limited,” Nomura said in a report. The surplus money is likely to be used to meet the fiscal deficit target of 3.3 percent of GDP, given a weak growth environment will result in low revenues from taxes, the report said. Morgan Stanley and Citi Research agreed.

On Monday, RBI announced a surplus transfer of Rs 1.76 lakh crore to the government, of which Rs 52,637 crore has been demarcated as excess provisions, in line with recommendations of a committee headed by former RBI Governor Bimal Jalan.

This comes at a time India’s GDP growth slumped to a five-year low in quarter ended March 31, hurt by domestic and global cues, intensifying clamour for tax cuts and fiscal stimulus.

With this additional source of income, the government should be “comfortable in meeting its fiscal target without any stress”, especially given that the budget was for less than a full year, Soumya Kanti Ghosh, chief economic adviser at economic research department of State Bank of India, told BloombergQuint.

While Morgan Stanley thinks that a big fiscal stimulus is still a low-probability event, it said the government is likely to continue its calibrated response as indicated in the measures announced last Friday.

On Friday, Finance Minister Nirmala Sitharaman announced a slew of measures in an effort to boost the economy and market sentiment. These include rollback of a tax surcharge on foreign portfolio investors and immediate rollout of the Rs 70,000-crore bank recapitalisation plan announced in Union Budget 2019. The government also said it would announce more measures this week.

Still, Siddhartha Sanyal, chief economist at Bandhan Bank, doesn’t expect another slew of announcements just because of this source of funds.

Citi Research said given the government’s resolve in maintaining the FRBM’s (Fiscal Responsibility and Budget Management) targets, it’s likely to stay away from a fiscal stimulus and announce other calibrated measures. “This should be significantly positive for the bond market as the fiscal slippage risks would materially reduce,” it said.

India’s 10-year bond yield dropped for the second day today after the RBI’s surplus transfer. It fell 13 basis points to 6.24 percent. Also, the rupee strengthened 0.3 percent to 71.78 against the dollar.

With the surplus announcement and the absence of a big stimulus from Sitharaman’s measures on Friday, fiscal pressures definitely have eased “which is a positive for the bond market,” Arvind Chari, head of fixed income at Quantum Advisors, told BloombergQuint. If the government stays away from a fiscal stimulus going forward, the RBI is likely to announce more rate cuts, which in turn will lead to lower bond yields, he said.

Listen to the conversation with Chari here...

Saurabh Mukherjea, founder of Marcellus Investment Managers, said the stock market’s relief rally will continue in the near term.

“Can this lift the economy out of defunct? Can this resurrect the NBFC sector? Those are bigger, more meaningful questions that we’ll have to answer in the coming days,” he said.

Here’s what Mukherjea said about the market...

Here are other key highlights from the brokerage reports.


  • Dividend transfer will help the government achieve fiscal target, while leading to reserve money creation.
  • Will reducing pressure on the RBI to engage in open market operations buybacks.
  • We estimate that this is around 0.25 percent of GDP, higher than what the government had penciled in for FY20 Union Budget
  • Expects the shortfall in tax revenues to be around Rs 1 lakh crore (0.5 percent of GDP).
  • Changing the metric of stress implies that the level of adequacy of reserves has been modified by the committee.

Morgan Stanley

  • Trend of dividend transferred to government for future years will depend on the available contingency risk buffer.
  • Enhanced transfer from the RBI (of 0.7 percent of GDP versus budget estimate of 0.4 percent of GDP) gives the government greater flexibility fin its fiscal math.
  • Big fiscal stimulus is still a low-probability event.

Citi Research

  • An immediate cash transfer and partial utilisation of this money to settle the unpaid claims and GST refunds will improve system liquidity even more from the current Rs 1 lakh crore.
  • The hope of a fiscal stimulus from this windfall should keep equities buoyant in the near term.
  • Even without a stimulus, a quick spend of Rs 1.5 lakh crore of the cash could provide the necessary fillip to the sluggish economy
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