RBI payout may slump in disappointment for markets, fund says

Bond traders pinning their hopes on a larger-than-budgeted central bank payout to Prime Minister Narendra Modi’s government may be in for a disappointment, according to Quantum Advisors Pvt.

The Reserve Bank of India will probably transfer as much as ₹60,000 crore ($8 billion) for the year to June 30, sticking with estimates unlike last year when the payment was almost double the amount budgeted, said Arvind Chari, Mumbai-based head of fixed income at Quantum. That’s because the RBI earned lower interest on its bond and deposit investments while it had to fork out more to banks for parking their funds with it, Chari said.

Quantum’s prediction runs counter to that of several analysts, who say the central bank is adding to record foreign-exchange reserves partly to ensure a bigger transfer to the revenue-starved government. Lockdowns to combat the coronavirus have ravaged businesses and pushed the economy toward a rare contraction, eroding public finances.

“The surplus transfer will see a big drop,” said Chari. “If this is true, it will be a negative surprise to the markets,” as “the expectation was for a higher transfer from the RBI given the dire fiscal situation.”

The transfer of the central bank’s excess capital has been a contentious issue between the central bank and the government and was one of the reasons that led to Governor Urjit Patel resigning in 2018.

The government had budgeted to raise about ₹90,000 crore from the RBI and other financial institutions in the financial year that started April. “This just puts more pressure on the RBI to get directly involved in funding the fiscal deficit and supporting the bond market,” Chari said.

A spokesman for the RBI wasn’t immediately available for comment.

Due to a change in the accounting norms, the RBI is likely to earn about ₹25,000 crore from its foreign-exchange operations, compared with ₹29000 crore last year, Chari said. Meeting the requirement of contingency reserves at 5.5% to 6.5% of the balance sheet will require the RBI to retain about ₹66,000 crore as compared with a transfer of ₹52,000 crore last year, according to his estimates.

“The mechanism that allowed for a higher transfer last year may take away money this year,” Chari said.