RBI's Rs 2.1 lakh cr bonanza to govt brings cheer to stock market

The Reserve Bank of India’s whopping dividend payout of Rs 2.1 lakh crore for FY24 has given the stock markets a major reason to celebrate. On May 23, frontline indices started with modest gains but soon soared to new highs, thanks to significant jumps in banking and financial stocks, the primary beneficiaries of this windfall.

What's the deal?

Doubling the Rs 1.02 lakh crore projected in the 2024 interim budget, this hefty dividend provides the government with extra funds to ramp up capital expenditure, lower the fiscal deficit, or a mix of both. Whatever the path, it’s already lifting market sentiment.

Banks benefit

The higher fiscal headroom spells good news for banks, as it means less government borrowing, keeping interest rates in check. Lower rates could mean more treasury gains for banks. Nifty Auto led the sectoral gains, but otherwise, it was banking and financial services sector that led in today’s trade: Nifty Bank (2.1 percent), Nifty PSU Bank (1.94 percent), Nifty Private Bank (1.98 percent), and Nifty Fin Services(1.90 percent).

Sunny Agrawal, head of fundamental equity research at SBICAPS Securities, predicts a further drop in domestic bond yields, which will boost banking stocks, especially public-sector banks. "Public-sector banks will see their treasury incomes go up," Agrawal said.

"In addition, the anticipated inclusion of India's bonds in the global bond index will additionally stimulate inflows into the debt market, thereby impacting the yield curve positively. We foresee yield on the 10-year government bond dipping below 7 percent in the upcoming months," Fisdom Research stated.

Capex bounty

With the private sector’s capex spending still lukewarm, this extra dividend lets the government keep the public spending engine running, benefiting capital goods, construction, and infrastructure stocks. Kotak Institutional Equities noted, "The government can continue with its capex thrust by increasing allocations to roads, railways, and defence." The RBI’s dividend windfall accounts for around 11 percent of the government’s current capex allocation for FY25.

Agrawal also highlighted the potential for a reduction in income tax rates, which would boost consumption and bring cheer to consumption-related stocks.

Fiscal strengthThis surprise bonanza makes it easier for the government to achieve fiscal consolidation and lower the fiscal deficit in FY25 to below 5 percent of GDP, compared to the budgeted target of 5.1 percent. This will lower the government’s market borrowing in FY25.

Fisdom Research believes this will enhance investor confidence in the government’s fiscal prudence, attracting FII flows across asset classes. A stronger fiscal position will boost confidence in Indian assets even more, justifying India’s premium valuations, analysts said.

Also Read | Higher RBI dividend to help ease fiscal deficit by 0.2-0.4% in FY25, say economistsDisclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.