India: Striking the right balance – Standard Chartered

Anubhuti Sahay, head of South Asia Economic Research at Standard Chartered, notes that the Reserve Bank of India (RBI) accepted the much awaited Jalan Committee report on 26 August.

Key Quotes

“The government had charged the six-member Jalan Committee in late December 2018 with (1) assessing the RBI’s economic capital framework, (2) evaluating whether the RBI was holding excess capital after factoring in adequate risk provision and (3) recommending a suitable dividend distribution policy from the RBI to the government. The report was expected by April 2019, but was delayed.”

“Markets have focused on this report, as any one-off excess capital transfer from the RBI to the government could assuage worries about potential slippage in the fiscal deficit, and thus reduce risks of additional market borrowings in FY20 (year ending March 2020).”

“Jalan committee recommendations are still likely to be positive for the rates market for two reasons. First, the estimated excess capital transfer of INR 530bn will be made in one move instead of being staggered over three to five years. Hence, windfall revenue in FY20 is likely to be strong. Second, based on the Committee’s assessment of dividend policy after factoring in risk provision, the RBI will be able to transfer a record-high dividend of INR 1.24tn (1trn after factoring in an interim dividend payment) in FY20.”

“Overall, the government is likely to receive additional revenue inflows of INR 600bn (0.3% of GDP) over the budgeted amount for FY20 – no excess capital transfer was pencilled into the budget, while INR 900bn was pencilled in as an RBI dividend payment to the government. 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. On the margin, as the excess capital transfer would happen only in FY20, some market participants may be concerned about fiscal pressures in FY21.”