BondThe higher-than-expected dividend transfer approved by the Reserve Bank of India (RBI) is likely to improve liquidity conditions in the banking system, which will result in a fall in short-term rates, money market experts said.
Story continues below Advertisement Remove Ad“The RBI dividend will further boost government cash surplus which was tracking at Rs 2.5 lakh crore as of May 17, 2024.
Currently, liquidity in the banking system is estimated to be in deficit of around Rs 2.56 lakh crore as on May 21.
The surplus transfer is for the fiscal year 2023-2024 but will reflect in the government’s account in the fiscal year 2025.
Further, dealers expect that bond yields, especially the 10-year benchmark bond, will trade in the range of 7.00 percent to 7.05 percent in the near term.
Bond
The higher-than-expected dividend transfer approved by the Reserve Bank of India (RBI) is likely to improve liquidity conditions in the banking system, which will result in a fall in short-term rates, money market experts said.
It will also help the government to reduce dependence on market borrowings and eventually bring down borrowing costs, they said.
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“The RBI dividend will further boost government cash surplus which was tracking at Rs 2.5 lakh crore as of May 17, 2024. The larger-than-expected dividend could provide space to cut borrowings (G-sec /T-bills), to reduce near-term liquidity drain,” said Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank Economics Research.
Adding to this, Dipanwita Mazumdar, Economist at Bank of Baroda, said the government can hence reduce its dependence on market borrowings, which are currently budgeted at Rs 14.13 lakh crore (gross) and help lower borrowing costs.
Currently, liquidity in the banking system is estimated to be in deficit of around Rs 2.56 lakh crore as on May 21.
Also read: RBI board approves record surplus transfer of Rs 2.11 lakh crore to government for FY24
RBI surplus transfer
On May 22, the RBI’s Central Board of Directors approved the transfer of Rs 2.11 lakh crore as surplus to the government for the financial year 2023-24. This is the highest ever yearly surplus transfer to the government by the Indian central bank.
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The central bank said the surplus transfer to the government for the financial year 2023-24 is based on the Economic Capital Framework (ECF) adopted by the RBI on August 26, 2019, as per recommendations of the Bimal Jalan committee. The sharp jump in the surplus amount could be attributed to higher income from the forex holding of the central bank, among other factors.
The dividend, transferred in 2024-25, is sharply higher than what the government had originally expected. The surplus transfer is for the fiscal year 2023-2024 but will reflect in the government’s account in the fiscal year 2025.
Also read: Higher RBI dividend to help ease fiscal deficit by 0.2-0.4% in FY25, say economists
Bond yields at over 2-month low
After the RBI announced the dividend, yields on bonds, especially on the 10-year benchmark bond, fell to over a two-month low of 7.037 percent on May 22.
Government bond yields have been falling for the last few weeks due to lower inflation print and buyback of G-sec conducted by the RBI to infuse liquidity in the banking system.
Further, dealers expect that bond yields, especially the 10-year benchmark bond, will trade in the range of 7.00 percent to 7.05 percent in the near term.
“10-year benchmark yield will be mainly dependent on the government’s decision to reduce borrowing or increase capex. Before any such clarity, I expect the 10-year bond to trade in the close range of 7.00-7.05 percent as I do not expect sub 7 percent level to sustain for long,” Mataprasad Pandey, Vice President, Arete Capital Service, said.
