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India

India cenbank's high surplus transfer to buffer hit on govt revenues

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FILE PHOTO: A Reserve Bank of India (RBI) logo is seen at the gate of its office in New Delhi, India, November 9, 2018. REUTERS/Altaf Hussain/File Photo

MUMBAI, May 21 (Reuters) - The Reserve Bank of India's board approved a significantly higher than expected surplus transfer to the government on Friday but it may not be enough to cushion the damage from a crippling second wave of the novel coronavirus.

The RBI announced a surplus transfer of 991.22 billion rupees ($13.58 billion) for the 9-month period from July 2020 to March 2021, the central bank said in a statement. The bank will move to an April to March accounting year from 2021/22, from a July to June year.

The higher-than-expected dividend or surplus transfer to the government comes as the government is expecting a sharp sequential fall in tax collections due to the severe second wave of COVID-19 which has forced lockdowns in several states.

"This surplus likely reflects the central bank's higher income from their open market operations as well as receipts from FX sales, with its transfer to the government's coffers providing some cushion to the pandemic-driven shortfall in revenues," said Radhika Rao, an economist with DBS.

The government had budgeted to receive a surplus of about 500 billion rupees from the RBI to be accounted for in the budget for 2021/22, while in the previous full accounting year, the RBI had transferred 571.28 billion rupees as surplus.

Barring 2018/19, this is the highest ever transfer by the RBI in a year. In FY19, 1.76 trillion rupees was transferred to the government which included a one-time transfer of extra reserves.

The government is likely to find it challenging to meet its privatisation and disinvestment target of $24 billion while goods and services tax revenues are also likely to fall, a government official said.

"The government is also under pressure as it has no option to cut expenditure given that it needs to spend to spur some investment and perk up growth from record low levels that it hit last year. The dividend is welcome but the government will need more and hope divestment can deliver," the official said.

Aditi Nayar, chief economist at rating agency ICRA, said the considerably higher surplus transfer would provide a buffer to absorb losses from indirect tax revenues anticipated in May and June this year.

"Moreover, high commodity prices at a time when demand and pricing power are subdued, would dent the margins of corporates in many sectors, compressing the growth in direct tax collections," she said.

($1 = 73.0180 Indian rupees)

Reporting by Swati Bhat; Editing by Alison Williams

Our Standards: The Thomson Reuters Trust Principles.

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