RBI’s fund transfer allays fiscal concerns, but room for stimulus still limited | Ethical Research

• According to economists, the government is likely to receive additional revenue inflows of around ₹60000 crore
• Fiscal slippages are also likely to weigh on government yields

In-line with the recommendations of the Bimal Jalan Committee, the Reserve Bank of India (RBI) will transfer ₹1.76 trillion to the government this fiscal year.

Since this government has shown a commitment to fiscal consolidation, economists expect excess money to be largely reserved to meet the expected shortfall in tax revenues. Of course, some of these funds may also be used for recapitalizing public sector banks, which the government decided last week to disburse upfront.

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This means, given inadequate Goods and Services Tax (GST) collections, concerns about fiscal deterioration are allayed to some extent for now. However, what this also means is that the legroom for major stimulus measures from here on remains limited.

Going by the estimates of Anubhuti Sahay, senior economist at Standard Chartered Bank, overall, the government is likely to receive additional revenue inflows of around ₹60,000 crore. “This is likely to assuage worries about fiscal slippage — we estimate that the FY20 fiscal deficit target faced a slippage risk of 0.5% of GDP on ambitious tax targets. As most of the excess revenue is likely to be used to contain any fiscal slippage in FY20, room for fiscal stimulus remains limited, in our view," she said in a report on 27 August. GDP stands for gross domestic product.

As anticipated, reacting to this development, bond yields rallied in early trade on Tuesday. The 10-year bond yield fell to 6.39% from Monday's close of 6.48%.

Economists at Kotak Institutional Equities Ltd said in a note to clients, "While the initial reading could be positive for GSecs, fiscal slippage risks will continue to weigh on yields." Their view is that “fiscal slippage risks remain given our estimated shortfall of around ₹1.5 trillion in GST revenues. If direct taxes disappoint, too, fiscal pressures will intensify (amidst slowing growth)."

Although GST collections breached the ₹1-trillion mark in July for the third month in a row, economists said the pace of growth was insufficient to match the targeted ₹6.63 trillion for the current fiscal year, as far as the central government's share was concerned.