RBI surplus transfer to Centre likely to impact economy, markets, banks: Experts

Market Outlook
The S&P BSE Bankex which led the charge on May 21 rallied over 7 percent

The S&P BSE Bankex which led the charge on May 21 rallied over 7 percent

Banking stocks that led the rally on May 21 would be in focus in the coming week as well after the Reserve Bank of India (RBI) said that it would transfer a surplus of Rs 99,122 crore to the government for the nine-month accounting period ended March 31.

The S&P BSE Bankex which led the charge on May 21 rallied over 7 percent for the week ended on May 21 compared to a nearly 4 percent gain seen in the S&P BSE Sensex.

The bank also decided to maintain the contingency risk buffer at 5.5 percent. The decisions were taken at the 589th meeting of the Central Board of Directors of RBI held under the chairmanship of Governor Shaktikanta Das on May 21.

The amount transferred is higher than market expectations, and any additional liquidity will cushion the fiscal deficit burden for the government. The global rating agency, Moody’s in a report highlighted that it has estimated the general government debt burden to reach 90 percent of GDP in fiscal FY22, and 90.8 percent in FY23.

“The RBI’s decision to transfer Rs 991 bn to the government, while higher than expected, is still within its realms of keeping the contingency risk buffer at 5.5% of the RBI’s Balance sheet,” Naveen Chandramohan, Founder, ITUS Capital said.

“RBI has ensured that the additional liquidity that it’s bringing into the system through the government’s balance sheet is coming at a time when inflation is low.

This is a huge positive for the economy, as it gives levers for the government to front-end spending especially towards infrastructure growth, post addressing the spending on Covid,” he said.The additional amount would help the government offset the impact of lower tax collection due to on-going restrictions, and support the divestment program which slowed down due to COVID, suggest experts.

We spoke to various experts on how RBI surplus transfer will impact markets economy and sectors:

Kunj Bansal, CIO, Karvy Capital

The amount transferred is higher than market expectation. So, it will be taken positively by the market. The country is staring at a higher fiscal deficit so any inflow is good news.

Club this with recent Axis Bank stake sale money raised by govt (though that is part of planned divestment numbers), all these will be positive news for the economy.

Sanjeev Jain, VP Equity Research, Sunness Capital India

The move is positive for the market. And, we have seen its glimpse in Friday’s trading session. From the last couple days, the positivity rate has fallen and the government focus on vaccination programmes along with the expectation of a state-wise economy unlocking in near future will drive the market towards the northward direction. I will not be surprised if markets make a new high soon

Market participants must keep the focus on Auto, Banking, cement, FMCG, and IT. Apart from this BPCL and Bharti Airtel look good from a short to medium-term time perspective.

Vinit Bolinjkar, Head of Research, Ventura Securities Ltd.

In the last budget, the entire focus of the government was to kick-start the economy through a multi-pronged approach by stressing infrastructure development in a planned way.

When a large portion of government finances are utilised to fight against COVID, such a huge payout by RBI will act as a breather and would get allocated towards infrastructure spending, which is the core of the economy.

We believe that the market will take it positively and sectors like infrastructure, banking, cement, metals, etc. would be the key beneficiaries.

Surplus liquidity in the market, lower interest rates, and pick in infrastructure activities due to government spending are expected to first improve project financing, followed by pick in the capex cycle.

This will significantly enhance corporate lending of banks and NBFCs. We are bullish on PSUs and large private sector banks.

Ajit Mishra, VP – Research, Religare Broking Ltd

The banking sector could get a boost directly or indirectly. The PSU banks could get additional funds if required.

Additionally, considering tax collections are expected to take a hit and the government cannot afford to reduce spending, additional surplus transfer from the RBI is a positive move not only for the economy but for the banking sector as well.

As higher revenues would also help the government to limit the fiscal deficit which is positive for banks.

Binod Modi Head-Strategy at Reliance Securities.

Sharp 74% YoY jump in surplus transfer from RBI to government has come in at much needed time, when the country is under the grip of second wave of COVID-19, and the government requires incremental financial resources to spend in healthcare and infrastructure space.

As actual surplus of Rs991bn is higher by about Rs490bn from government’s budget estimate, it offers a cushion of upto 25bps of GDP to the government.

While this augurs well for the economy and hence markets, market participants will be taking more comforts from improving visibility with the weakening second wave of COVID-19. This may drive financials and therefore markets further.

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