The Reserve Bank of India (RBI) will again make a record surplus transfer to the government for this April-to-March financial year, a windfall that economists polled by Reuters said would not be sufficient to prevent India from missing its fiscal deficit target.The RBI, which is due on Friday (May 22) to report how much it will hand over to the Treasury, is expected to transfer a sizable amount this year, in large part from profitable US dollar sales after it intervened in the foreign exchange market to stem the rupee’s slide.
A Reuters poll of 25 economists taken on May 19 and 20 showed the RBI is likely to transfer a record dividend of ₹2.9 lakh crore to ₹3.2 lakh crore ($30.0 billion to $33.1 billion) to the Treasury, matching the government’s forecast in this financial year’s budget.
A slim majority, 12 of 22, said the Treasury is becoming too reliant on these transfers, which have surged 55-fold over the past two decades.Under recently revised rules that were originally laid out in 2019, the RBI is recommended to maintain a contingency reserve of 4.5% to 7.5% of its balance sheet and transfer the rest to the government. The reserve is currently maintained at 7.5%.An expected ₹3.05 lakh crore handover, the midpoint of the poll, would be the highest share of expected government revenue in more than two decades, excluding the fiscal year 2019-2020.But such transfers are unlikely to fully shield the budget from the US-Israeli war on Iran, economists said, as higher crude oil prices, a record-low rupee, weaker revenue growth and the prospect of additional spending strain public finances.”This year, the RBI’s profits will go up even more because it has sold off dollars massively … so it is expected that the dividends will (also) go up,” said Apoorva Javadekar, chief economist at Muthoot Fincorp.Dollar sales are now benchmarked to the historical average price of FX purchases, which is much lower than the current dollar-rupee rate, allowing for large gains on sales.”We cannot give an impression to foreign or domestic investors that ’look, we don’t care about fiscal deficits because we can always fund them through the RBI,’” Javadekar said.Median forecasts from the poll pegged the fiscal deficit at 4.7% of gross domestic product this fiscal year. Some said it could go as high as 5%, more than last year’s 4.4% and above the government’s 4.3% target.Piramal Group chief economist Debopam Chaudhuri, who forecast a fiscal deficit of 4.6%, said that would amount to more than 18 trillion rupees, higher than the government’s estimate of around 17 trillion rupees.”The government is not here to earn from the RBI,” said Anil Bhansali, head of treasury at Finrex Treasury Advisors. ”The government is here to earn from taxes … At present, they have no other alternative … to generate extra revenue.”But not everyone agrees.”While the RBI dividend has provided the Finance Ministry with a robust cushion, there have been serious efforts to consolidate the government’s balance sheet while also improving the quality of spending,” said Aditya Vyas, chief economist at STCI Primary Dealer.
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