RBI Dividend’s Payout to help Indian Government reduce Deficit
India’s new government will get $25 billion from the central bank, which can be used to either spend more or reduce the budget deficit. Both options are seen as positive by investors.
The Reserve Bank of India (RBI) announced it will give the government Rs.2.11 lakh crore dividend payout to the government, much more than expected. This led to lower bond yields and higher stock prices. The money can help the new government, elected after the elections, lower the deficit by 0.3% of GDP or spend more on infrastructure or social programs, as per a professional tax expert.
It is noted that bond markets prefer deficit reduction, while stock markets might prefer more spending.
During the election, the Congress party promised cash payments to poor women and unemployed youth, and debt relief for farmers. The ruling BJP avoided making big new welfare promises.
One Economics University expert said the extra funds could help manage the deficit and increase spending on projects. He also suggested that states needing help with their projects could benefit.
Kotak Mahindra Bank’s Chief Economist expects the deficit to shrink by 0.4% in FY25 due to the extra funds, which would also ease pressure on bond markets.
SBI Mutual Fund’s Chief Investment Officer highlighted the positive impact on revenue and borrowing, suggesting the funds could be used for more projects, revenue initiatives, faster deficit reduction, or a combination.
A Chief economist of Top Company said the funds could speed up deficit reduction or be targeted at important spending areas.
An analyst said using the extra money to cut the deficit could improve India’s credit rating. Analysts agree that how the new government uses the RBI’s money will be crucial for India’s economic future.
