How Will The RBI Dividend Payout Affect The Stock Market? | Share Market News

Summary

The NDTV Profit Morning show discusses the Reserve Bank of India's (RBI) healthy balance sheet and its implications for the economy and government fiscal deficit targets. Experts analyze the RBI's bumper surplus and its potential impact on the bond market, with insights on the fixed income market's response to the large dividend payout. The conversation covers the importance of the RBI's role as the government's banker and debt manager, asset revaluation, and the outlook for rate cuts and liquidity in the market.

Takeaways

• 🏦 The Reserve Bank of India (RBI) has a healthy balance sheet with a significant surplus, which it is transferring to the government.
• 💡 The RBI's role is compared to a 'stingy wife' in relation to the government, which is an 'extravagant husband' always asking for funds.
• 📈 The surplus is attributed to the reevaluation of assets such as foreign currency assets and gold, which make up a large portion of the RBI's total assets.
• 💼 The RBI's surplus is beneficial for the government's fiscal deficit targets and could support national objectives and developmental functions.
• 📊 The large dividend payout by the RBI is expected to positively impact the fixed income market and potentially lead to a decrease in bond yields.
• 🤔 There is a call for caution in interpreting the RBI's surplus as the final budget post-elections will provide a clearer picture of fiscal consolidation.
• 💧 The immediate impact on market liquidity is not expected as the surplus adds to government coffers, and spending will determine liquidity changes.
• 🛠️ The government's capital expenditure (capex) priorities are clear, and market reactions will depend on whether the funds are used for spending or fiscal consolidation.
• 🌐 The inclusion of India in the JP Morgan Bond Index and the potential for foreign portfolio investors (FPIs) to resume frontloading are mentioned.
• 📉 Despite the current attractiveness of duration in the bond market, Indian investors have not seen significant M2M gains due to the flat yield curve over the past two years.
• 🔮 Looking forward, there is an expectation of rate cuts which could eventually lead to capital gains for bond investors, but caution is advised due to ongoing geopolitical and economic risks.

Q & A

What is the significance of the RBI's balance sheet health for the economy?

The health of the RBI's balance sheet is critical for the functioning of the economy. It indicates that the central bank is in a strong financial position, which is evidenced by its ability to provide a substantial surplus to the government.

How does the RBI's surplus impact the government's fiscal deficit targets?

The RBI's surplus can help the government meet its fiscal deficit targets by providing additional funds, which can be used for developmental and other national objectives without increasing the fiscal burden.

What is the relationship between the RBI and the government in terms of financial management?

The RBI acts as the banker and debt manager for the government. It is akin to a relationship between a frugal wife and a spendthrift husband, where the RBI provides funds when necessary for the government's needs.

What factors contributed to the RBI's bumper reserve?

The bumper reserve is due to the reevaluation of assets such as foreign currency assets and gold, which constitute a significant portion of the RBI's total assets. Additionally, domestic assets like penalties on banks have also contributed to the increase in asset size.

How does the RBI's dividend payout to the government affect the fixed income market?

A large RBI dividend can positively impact the fixed income market by providing a sense of fiscal consolidation and potentially leading to a decrease in bond yields, making bonds more attractive to investors.

What is the potential impact of the RBI's dividend on market liquidity?

While the dividend itself does not immediately change market liquidity, it adds to the government's coffers, which could lead to increased spending and, consequently, an impact on market liquidity over time.

What is the current stance of the bond market regarding the RBI's dividend announcement?

The bond market views the dividend positively as it signals fiscal consolidation and potential rate cuts. However, it is waiting for the final budget post-elections to determine the trajectory of rates and the government's spending plans.

How should investors approach bond investments in light of the RBI's decision?

Investors should consider the current environment of low inflation and potential rate cuts as favorable for bond investments. However, they should also be mindful of broader macroeconomic risks and the government's spending plans.

What is the potential impact of the RBI's dividend on private capital expenditure?

The additional funds provided by the RBI's dividend could reduce the crowding out effect on private sector expenditure, allowing the private sector to pursue expansion plans without being constrained by government spending.

How might the government's use of the RBI's dividend influence the bond market's reaction?

If the government uses the dividend for capital expenditure, which can boost GDP growth, the bond market may react positively. However, the market's response will also depend on the government's overall fiscal consolidation path and spending plans.

What is the implication of the RBI's dividend for foreign portfolio investors (FPIs)?

The RBI's dividend could encourage FPIs to resume front-loading investments in the Indian bond market, especially if the government's spending plans align with market expectations and contribute to economic growth.

Outlines

00:00

🏦 RBI's Surplus and Its Impact on Fiscal Deficit

The first paragraph discusses the implications of the Reserve Bank of India's (RBI) financial health and its recent surplus for the government's fiscal deficit. It explains that the RBI's balance sheet is robust, having minimized expenses and accumulated a significant surplus, which it can now provide to the government. The relationship between the RBI and the government is likened to a 'stingy wife and extravagant husband,' highlighting the RBI's role as a cautious financial manager. The surplus is attributed to revaluation of assets, including foreign currency and gold, as well as domestic assets like penalties on banks. The discussion also involves Mr. Cumar from Access Mutual Fund, who joins the conversation to explore the potential impact of the RBI's dividend payout on the fixed income market and government spending.

05:00

📈 Fiscal Consolidation and Private Sector Growth

In the second paragraph, the conversation continues with insights into the RBI's contingency reserve and its annual provision, which contributes to the RBI's surplus. The experts discuss how this surplus provides the government with additional funds that can be used for economic growth and infrastructure development without crowding out private sector investment. The potential for rate cuts and the attractiveness of bond investments in the current economic climate are also debated. The focus is on the government's spending plans and the bond market's reaction to the RBI's decision, with an emphasis on the importance of capital expenditure for long-term economic benefits.

10:02

📊 Market Liquidity and Investment Strategies

The third paragraph delves into the potential effects of the RBI's dividend on market liquidity and investment strategies. It addresses the pause in foreign portfolio investments ahead of India's inclusion in the JP Morgan Bond Index and speculates on whether the RBI's move could encourage a resumption of front loading. The discussion highlights the importance of a medium-term perspective for bond investments and the potential for capital gains as rates are expected to cut in the future. The experts also consider the risks associated with geopolitical pressures and inflation, advising investors to maintain a long-duration strategy despite these uncertainties.

Keywords

💡RBI (Reserve Bank of India)

The RBI is India's central banking institution, which controls the issuance and supply of the Indian rupee and oversees the country's monetary policy. In the video, it is highlighted for its significant role in maintaining the economy's health, as evidenced by its large surplus and dividend payout to the government.

💡Fiscal Deficit

The fiscal deficit refers to the gap between the government's total expenditure and its total revenue (excluding borrowing). The video's discussion centers on how the RBI's surplus and dividend payout could help the government in meeting its fiscal deficit targets, impacting the overall economic stability.

💡Dividend Payout

A dividend payout is the distribution of a portion of a company's earnings to its shareholders. In the context of the video, the RBI's substantial dividend payout to the government is discussed as a means to support fiscal objectives and potentially influence market liquidity and fiscal consolidation.

💡Balance Sheet

A balance sheet is a financial statement that summarizes an entity's assets, liabilities, and shareholders' equity. The video mentions the RBI's balance sheet as being very healthy, which is a positive indicator of the institution's financial stability and its ability to support the economy.

💡Fiscal Consolidation

Fiscal consolidation involves policies aimed at reducing government deficits and debt accumulation. The video touches on how the RBI's dividend payout could aid in fiscal consolidation efforts, thereby ensuring that government spending is sustainable and that economic growth is supported.

💡Market Liquidity

Market liquidity refers to the ease with which assets can be bought or sold in the market without affecting the asset's price. The video explores how the RBI's actions and the government's subsequent spending decisions might influence market liquidity, particularly in the bond market.

💡Bond Market

The bond market is a financial market where participants buy and sell debt securities, typically in the form of bonds. The discussion in the video includes the impact of the RBI's dividend payout on the bond market, such as potential changes in yields and investment strategies.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, eroding purchasing power. The video references inflation in the context of how fiscal policies and market conditions could affect inflation rates and the overall economic environment.

💡Capex (Capital Expenditure)

Capex refers to funds used by an organization to acquire or upgrade physical assets such as property, industrial buildings, or equipment. The video discusses how the government's decisions on using the RBI's dividend payout for capex could influence economic growth and market perceptions.

💡Core Inflation

Core inflation measures the long-term trend in a particular price level, excluding items with volatile prices, like food and energy. The video mentions core inflation in relation to fiscal policies and market strategies, noting its significance in understanding the underlying inflation trends.

Highlights

RBI's balance sheet is very healthy, showing a big surplus to give to the government.

RBI is the banker and debt manager for the government, with a relationship likened to a stingy wife and extravagant husband.

RBI's bumper reserve comes from reevaluation of assets like foreign currency and gold.

2.1 lakh CR dividend payout by RBI is good news for the bond market.

Large RBI dividend helps government meet fiscal objectives and assures fiscal consolidation path.

Interim budget's fiscal path is better than expected, but final budget after elections will be key.

RBI's decision could impact market liquidity over time as government spending increases.

Fixed income market sees comfort in RBI's decision for glide path, but awaits clarity on government spending.

RBI's contingency reserve provision varies yearly based on its income.

Government's use of the RBI dividend will determine the bond market's reaction.

Investors should have a medium-term holding period for bonds rather than expecting short-term gains.

Rate cuts are anticipated, making long duration bonds an attractive investment.

Geopolitical pressures and inflation risks could change the macro view on bonds.

Indian families and HNIs have been investing in duration over the last 8-12 months with limited M2M gains.

Frontloading of infrastructure spending by the government could be积极的 depending on the quality of spending.

RBI's inclusion in JP Morgan Bond Index in June may influence FPIs to resume frontloading.

Transcripts

now on this Dr P very good morning to

you and thank you for speaking with us

here at NDTV profit morning good morning

ma'am just wanted to get your first uh

sort of take on this now a lot of

interpretations of its impact in terms

of how it will help the government's

fiscal deficit targets Etc but what is

it telling us about the health of the

rbi's own balance sheet and the economy

let me start with your take on

that wonderful you really put it very

well it shows you that the balance sheet

of The Reserve Bank which of course

plays a very critical role in the

functioning of the economy is very very

healthy and it's it's grown and the RBI

has minimized its expenses and it is a

big bumper Surplus to give to the

government now um as I can I can tell

you that the RBI is the banker to the

government which of course you know and

it's also the debt manager of the

government uh to put the relationship

between the RBI and the government very

simply uh for your viewers let me say

that it's like the relationship between

a very stingy wife and a very

extravagant husband who will always keep

asking for funds but when the funds are

required as in this case for

developmental functions and development

functions are very necessary to support

National objectives then the wife

reaches under the mattress and cops out

so how have we done that that we have

got this bumper Reserve because we have

reevaluation of our assets foreign

currency assets gold including gold

deposits gold held in India which

constitute about 72.3 4% of our total

assets and these have increased then

there are our domestic assets you know

the penalties on Banks and so on and the

increase on the asset size has been due

to the rise in foreign investment Golds

loans and advance

and Tam these are all audited accounts

which which are as for the RBI right we

also have R cumar head corporate

strategy at access mutual fund now

joining in good morning Mr cumar it's a

it's a pleasant morning to be going into

work i' imagine with RBS Bonanza uh to

the government uh with a 2.1 lakh CR

dividend payout what is this going to

mean for the fixed income Market we did

see yields dip below 7% yesterday but do

you feel like the next couple of days

days and weeks could continue to see M2M

gains on debt

portfolios hi good morning every and yes

obviously it's great news from a bond

market perspective uh to get a large RBI

dividend and that the market will then

look at this as a significant uh move uh

you know in terms of fiscal

consolidation the government has in its

interim budget already uh pegged a

fairly um you know better than expected

path of fiscal consolidation and this

will go some way uh towards uh you know

assuring in some sense that those

objectives will be met so so the I think

the larger message is that this greater

than expected I mean it's almost twice

as expected uh uh size of the dividend

is uh definitely going to help uh the

government meet its uh fiscal objectives

I will uh urge some caution in over

interpreting this because uh remember

that the this is only an interim budget

so we will get a final budget after the

election and so we will the bond market

will wait for that to make a you know

sort of make up its mind about the

trajectory of rates going forward and of

course the fiscal surprise will only be

positive once we know where that money

is going to be spent but first up on

liquidity do you feel like there could

be an immediate impact on Market

liquidity after this Bonanza uh yeah so

one thing that we have observed in

recent past is that liquidity has gotten

tight as uh government cers have gotten

full and uh uh the expenditure in some

sense has been um shall we say not

forthcoming uh ahead of the C and so you

have seen some amount of liquidity

getting tight this move in itself does

not change that because it's essentially

adds more to the government cers so we

will have to wait for government to

start spending uh to have an immediate

or a or a decently large impact on the

liquidity in the system but we do expect

to see that over a period of time though

may not be in the next couple of

weeks s hi n good morning good time to

load on to bond portfolios um the debate

around rate Cuts may continue but this

at least on on the Indian inside this

gives Comfort on the Glide path for

sure I think it does N I think we

uh I think we've lost cumar okay we'll

try and get that back Dr pun is with us

as well Dr pun lovely comment by the way

this is n good morning lovely comment at

the start about how you set up the

trajectory just one question though did

anything in that announcement surpris

you at all or was this part for the

course looking at the uh looking at the

numbers that uh at The Reserve Bank per

se no not at all because there is a

provision for the rbi's contingency

reserve and N this is absolutely

something which happens every year and

it will vary as to the according to the

income of the RBI it's in terms of the

RBI act schedules

1934 and the audited accounts and it

gives a lot of money and Elbow Room for

expansion and for scorch economic growth

so if we are going to be the that's the

second largest economy then yes we have

to have a lot of money to spend which we

which the government now gets and uh uh

it is the due of the

government sorry um okay and it will

help the private sector because there

will be no crowding out of

expenditure the expenditure will the

private sector can put need not put it

expansion plans on hold because there is

a lot of money and the government may

not restrict its infrastructure spend

because there is a lot of money which

gives Comfort to everybody every

time right right no that's a that's a

fair call right we waiting for the

elusive private capex to come forth in

its true form it hasn't quite done that

thus far selectively maybe but not quite

okay um thanks for that point um Dr pun

s you're back we just lost you was just

asking you if if there's a time uh to

think of loading up on bond portfolios

lots of events around the corner yeah

but most of them positive so I think uh

we've been saying for some time that it

is good time to be invested in bonds we

have uh we are on the CP of the um index

related flows uh this dividend so I

think from a bond market demand Supply

uh perspective and overall like I said

the fiscal consolidation path uh the the

demand Supply uh characteristics AR good

more importantly the

inflation especially core inflation

continues to remain low and if uh food

inflation catches up to core I hope that

happens uh then we are looking at

significant rate cuts it may come

delayed but the path I think the

direction is right even if we don't

exactly know the path so I think yes it

is time to be loaded up on bonds at this

point of

time uh SAA how immediate do you think

you will see any impact of the rbi's

decision I mean we've been been talking

about Bond investments in a broader term

for a while now do you I think you're

going to see any specific sort of

activity or any new strategy basis this

decision or this announcement

yesterday does it really move the needle

is essentially the question it does move

the needle because it's a it's a large

amount it does move the needle in terms

of the fiscal uh situation uh but like I

said before the point is to wait for the

final budget and then take a call on

this rather than wait for now I think

this use uh as Dr B also just mentioned

this gives a lot of flexibility to the

government in terms of planning its

fiscal especially the spending part

because they don't have to be as worried

about resourcing um and so that is what

we'll be watching to see whether the

government uses this extraordinary

dividend to consolidate or whether they

will use it to spend and both are good

choices the question is the question

from a bond market perspective is uh

which one will the government take and

uh so I think uh we will have to wait

until the the budget to take a you know

s of Final Call on the direction but the

path I mean like I said the direction is

more clear rather than the timing or the

exact path right so it's only a matter

of time uh now I will also say that once

all those risks are resolved right the

rates the yields won't be here they

would be significantly lower if

everything pans on in this way so you

cannot wait for these events to pass

before getting invested yeah yeah no so

just to to take that point further if

July is when things will become clearer

on what essentially the government does

this with does with this money does it

consolidate its fiscal deficit does it

spend more uh if it spends more which is

I think a possibility you have a new

term you want to frontload all of your

infra capex Etc how would you see

that I think the priority of the

government very clearly in terms of

capex in terms of building

infrastructure is very very clear and to

the extent that this helps that process

the markets will not be upset right

usually when you look at uh the bond

markets they they don't like it if if

it's soal you know poor quality spending

that is higher spending in current

expenditure but if you have a higher

amount of spending in capital

expenditure I don't think the Bond

markets are going to be as uh as upset

because it changes the potential GDP

growth and therefore the fiscal metrics

over a period of time uh because when

you look at the key fiscal metrics such

as debt to GDP ratio if it increases the

trajectory of GDP that expenditure is

not seen as a negative so I think it's

very important to see what path the

government takes I don't think Bond

markets will be upset either way of

course uh consolidation will be seen

very very positively uh but I I think if

the government goes for higher capex uh

the bond markets will probably be quite

okay with that SAA it's also sinina here

and I want to get your perspective on a

couple of things since April fpis had

almost taken a pause on front loading

ahead of India's inclusion in the JP

Morgan Bond index in June do you feel

like this move could now uh help FPS

resume that front loading A and B while

I completely take your point that

duration is a good space to be in right

now and looks attractive but remember

we've been saying this or talking about

this for the last two years now Indian

families Indian hnis have gone out and

invested in duration over the last 8 to

12 months now none of those portfolios

are making any M2M gains one thing aside

if you hold to maturity second what I

want to get from you is if there is a

bump up right now would you recommend

exiting these debt portfolios or do you

think it's better to wait it out for the

next 8 to 12 months in anticipation

maybe if a rate cutter as well coming in

from the

RBI yeah I think that's that's a very

important point that you know uh in the

near in the recent past we've not really

seen a big move and therefore whoever

have invested have largely made the

equivalent of the yield on the

portfolios or whatever rather than any

major Capital Gams when you look at two

years from where we started you know two

years ago about this time we 10 year

yield was 760 so if you look at over the

last two years we've actually seen a

decent size rally and I think people

don't appreciate that that has happened

during a period of rate hikes so what

then happens when rate Cuts eventually

start right so I think the the uh it's

do not look at near-term last 3 months 6

Months 8 months and then say that you

know I should be getting returns at

every 3-mth period it doesn't work like

that you have to have a medium-term

holding period And if and and as I've

said in the last couple of years when we

had all the worries about geopolitics

when we have had all the worries about

about Rising rates we've still seen

yields drop so I think have a little bit

of slightly you know different

perspective I have a little bit of

different perspective on this I think uh

uh we are uh we're in for rate cuts and

therefore we should make money now

having said that what are the risks

there are risks out there we are seeing

you know continued pressure on

geopolitics we could see a resurge of on

of inflation if we have an extraordinary

burst of growth pickup so we should be

aware that there are there are reasons

for changing the portfolio STS which are

not related to this particular news but

rather would be you know if we change

our macro View at this point of time I'm

not seeing those risk fructify and

therefore I feel confident in uh running

longer

duration yeah uh thank you drali and

thank you SAA for joining us that's good

perspective coming in so don't expect an

immediate impact on Market liquidity but

this is good news of the fixed income

Market duration continues to be an

attractive investment opportunity for

all our viewers who consider investing

in debt markets as well uh that's the

implied Nifty she got in better in the

last couple of minutes of trade started

off slightly lower now 15 Point higher

is what we're expecting we'll take a

break we'll come back it is also the

weekly Nifty expiry