Indian government anticipates to pay up to 1 trillion rupees ($12 billion) in dividends to the federal government, which will replenish New Delhi’s coffers and help it meet its budget deficit target, economists said.
Economists predict that the Reserve Bank of India’s board meeting, scheduled to meet this week, is likely to approve a dividend of 80,000 rupees to 1 trillion rupees.
In comparison, remittances last year were 87.42 trillion rupees, while the government target was 1.02 trillion rupees, including dividends from state-run banks.
The increase in dividends is likely to help the federal government meet its budget deficit target of 5.1% of gross domestic product (GDP) this fiscal year. It is also likely to support revenue and give spending flexibility to the new government, which will take office after the general election is completed early next month.
Teresa John, an economist at Nirmal Vann Institutional Equities, said by phone that the large surplus transfers “give the government more room to make up for shortfalls in investment returns and fund post-election welfare programs.” It will help produce.” She expects the dividend to be around 1 trillion rupees.
A narrower budget deficit can also improve a country’s credit rating, making it less expensive for the government to borrow money in the future. This can lead to lower interest rates on loans for businesses and individuals, further stimulating economic growth.
The RBI makes annual payments to the government from excess income it receives from investments and changes in the valuation of its dollar holdings, as well as fees it receives from printing currency. They are required to maintain a buffer against contingent risks of 5.5% to 6.5% of their balance sheets.
The main factors that may contribute to large excess remittances include the high interest income that central banks would earn from securities held in foreign and domestic markets. These benefits are expected due to tight monetary policies in many developed countries and domestically.
However, Gaura Sen Gupta, an economist at IDFC First Bank, said in a note earlier this month that revenue from foreign exchange trading may fall as the central bank sold fewer dollars in the last financial year than the previous year.
In the year to March 2024, RBI’s foreign exchange reserves increased by $67 billion.
Economists believe the payments could exceed 1 trillion rupees if the emergency buffer framework is revised. However, they warn that this reduction in buffers and the depletion of revaluation balances could have long-term fiscal implications through increased future government dividends.
This potential windfall comes at a time when governments are struggling to reduce budget deficits. Additional revenue from the RBI could provide much-needed headroom to meet spending targets and prioritize social welfare programmes.
The domestic market saw an inflow of Rs 3.23 trillion from abroad in FY 2024, marking a marked turnaround from the outflow of Rs 45.365 billion in FY 2022-23.
Of the total inflows, foreign investors invested Rs 1.2 trillion in the fixed income sector, the highest inflow since 2014-15, according to National Securities Depository data.
The currency experienced a slight depreciation of 0.5% against the dollar. The last time the Indian sector showed such stability was in 1994, when it grew by 0.4%.
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