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India gets US$24b windfall from RBI to spur growth

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India's government will receive a 1.76 trillion-rupee (US$24.4 billion) windfall from the central bank, which it may use to cut borrowings and recapitalize banks to help spur economic growth.

[MUMBAI] India's government will receive a 1.76 trillion-rupee (US$24.4 billion) windfall from the central bank, which it may use to cut borrowings and recapitalize banks to help spur economic growth.

The Reserve Bank of India's board approved the record payout on Monday, which includes a dividend of 1.23 trillion rupees and 526.4 billion rupees from its surplus capital, according to a statement. The dividend payment includes 280 billion rupees already transferred to the government in February.

The transfer - which rivals the stimulus that some Group of 20 nations pumped into their economies during the global financial crisis - comes amid a slowdown in India's growth to a five-year low, depressed consumer spending and reports of tens of thousands of job losses in the auto industry.

Finance Minister Nirmala Sitharaman last week announced various measures to spur growth, including hastening the capital infusion into state-run lenders. At the same time, she's trying to stick to a narrower fiscal deficit goal of 3.3 per cent of gross domestic product for this year.

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"The funds ensure that government can provide the necessary boost to the economy while keeping its fiscal deficit contained," said Dharmesh Kant, head of retail research at Mumbai-based Indianivesh Securities Ltd.

The Finance Ministry is keen to use the transfer to cut its budgeted borrowings, though it's yet to make a final decision on how to spend the amount, people with knowledge of the matter said.

Bonds rallied on the news, with the yield on the benchmark 10-year security dropping 8 basis points to 6.41 per cent.

The RBI pays dividends to the government every year, based on the profits from its investments and printing of notes and coins.

Over the past couple of years, the Finance Ministry has been seeking higher payouts from the RBI, arguing the central bank is holding more capital than it needs. It was a source of contention between the government and the former Governor Urjit Patel, who quit in December.

A panel, led by former Governor Bimal Jalan, was set up to study the central bank's capital framework. Its recommendation, accepted by the RBI's board on Monday, was that the central bank should hold realized equity of between 5.5 per cent to 6.5 per cent of its balance sheet, compared with the current 6.8 per cent. The board decided to maintain the realized equity level at 5.5 per cent, the central bank said.

The combined payout far exceeds the government's budgeted estimate of 900 billion rupees as dividend from the RBI this year.

Mr Sitharaman said last week the government will immediately inject 700 billion rupees of fresh capital into state-run banks to spur lending. The record transfer will ease risks of a tax revenue shortfall and allow the government to recapitalize the lenders, said Shubhada Rao, chief economist at Yes Bank Ltd in Mumbai.

The banking crisis has weighed on India's economy, the third-largest in Asia. Data on Friday will likely show growth weakened further to 5.7 per cent in the quarter ended June from 5.8 per cent in the previous three months.

The windfall will probably be pumped into banks, which should help reduce lending rates, Bank of America Merrill Lynch economists Indranil Sen Gupta and Aastha Gudwani said in a note. That would be a "game changer" for the economy, they said.

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