How Will The RBI Dividend Payout Affect The Stock Market? | Share Market News
Summary
TLDRThe 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
🏦 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.
📈 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.
📊 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.
Mindmap
Keywords
💡RBI (Reserve Bank of India)
💡Fiscal Deficit
💡Dividend Payout
💡Balance Sheet
💡Fiscal Consolidation
💡Market Liquidity
💡Bond Market
💡Inflation
💡Capex (Capital Expenditure)
💡Core Inflation
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
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