RBI authorizes the government to receive a ₹2.11-lakh crore surplus for FY24

The central board of directors of the Reserve Bank of India approved a hefty, record-breaking excess transfer of ₹2,10,874 crore for FY24, announcing a bounty to the Central Government. The government may be able to increase capital expenditures or reduce borrowing in FY25 thanks to this massive surplus transfer. Government security (G-Sec) yields may decrease if the government borrows less, which would lower its cost of borrowing.

The previous highest surplus transfer was ₹1,76,051 crore in 2018-19. The surplus transfer in FY24 is 2.41 times the previous year’s ₹87,416 crore. It is also much higher than both the budgeted and street estimates of ₹1-lakh crore surplus.

Following this announcement, the yield of the new 10-year benchmark G-Sec (coupon rate: 7.10 per cent) closed below 7 per cent on Wednesday at 6.9919 per cent, softening about 4 basis points (bps) compared with the previous close of 7.0351 per cent. The price of this security rose by about 30 paise to close at ₹100.75 (previous close: ₹100.445).

Bank of Baroda (BoB) economists Dipanwita Mazumdar and Aditi Gupta attributed the higher-than-anticipated surplus to higher interest income, led by an increase in both global and domestic yields. There were also revaluation gains on forex reserves.

“The higher surplus will have a positive impact on government finances. This is positive in terms of maintaining the targeted fiscal deficit. Thus, the additional ₹1-lakh crore gives the government the headroom to either cut back on its gross borrowing from the market, putting less pressure on domestic yields, or increase its thrust towards capex,” they said.

With bond-index-related FPI inflows also expected to surge in Q2FY25, the benchmark 10-year yield could thaw to as low as 6.75 per cent, assuming the RBI invokes rate cuts in the second half, per the BoB economists’ assessment.

In a statement, the RBI said that during accounting years 2018-19 to 2021-22, owing to the prevailing macroeconomic conditions and the onslaught of the Covid-19 pandemic, the Board had decided to maintain the risk provisioning under the Contingent Risk Buffer (CRB) at 5.50 per cent of the Reserve Bank’s Balance Sheet size to support growth and overall economic activity.

With the revival in economic growth in FY23, the CRB was increased to 6 per cent. As the economy remains robust and resilient, the Board has decided to increase the CRB to 6.50 per cent for FY24.