RBI’s record dividend of Rs.2.1 lakh crore to govt can help reduce its deficit

RBI declared a record dividend of Rs.2.1 lakh crore to govt, more than double what was expected by the money markets.

The dividend is more than the Rs.1.02 lakh crore that govt had budgeted as dividends from all financial institutions and will reduce its need to borrow from the market.

This is the second year in a row that the central bank has paid a dividend which is sharply higher than the amount that govt had budgeted.

The likelihood of a lower govt borrowing pushed down yields on the 10-year govt bonds to below 7%. Experts said the surplus transfer to govt will help it reduce the fiscal deficit and make funds avaailable for capital spending.

RBI’s decision to pay govt record Rs 2.1 lakh crore dividend – which will infuse substantial liquidity in to the banking system – led to a smart rally in the bond market. As a result, the benchmark yield on the 10-year paper fell below the psychologically important 7% mark after about a year.

At close of trade, the 10-year bonds maturing in 2034 closed at a yield of 6.99% while the one maturing in 2033 (the outgoing 10-year benchmark bonds) closed at 7.04%. Both the bonds saw yields fall by 6 basis points (100 basis points = 1 percentage point), RBI data showed.