New Delhi: A larger-than-expected surplus transfer by the RBI will have a limited impact on India’s medium-term fiscal consolidation, Fitch Ratings said Friday.
“While supportive of near-term fiscal performance, the one-off nature of the dividend, however, means the medium-term impact of this windfall on India’s consolidation and debt path will be limited,” said Jeremy Zook, director, Fitch Ratings’ Asia-Pacific Sovereigns team. The ratings agency noted that a positive rating impact would rather be dependent on sustained deficit reduction owing to revenue-raising reforms.
“Sustained deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for the rating fundamentals over the medium term,” Zook said. The government has set a target of bringing the fiscal deficit down to 4.5% of the GDP by FY26. For FY25, it had set a target of 5.1% of the GDP in the interim budget. The RBI board earlier this week announced a ₹2.11 lakh crore surplus transfer to the government, which experts note is expected to provide an extra 0.4% of GDP space to the government.
“The use of the dividend-whether it is saved or used for additional spending-could provide a signal around the government’s fiscal priorities,” Zook noted. Moody’s Ratings analysts note that the windfall can also be used for policies and initiatives the new government plans to launch. “The government could preserve expenditure restraint and facilitate further progress towards meeting its deficit target while lowering borrowing requirements that could, in turn, free up liquidity in the market for other purposes; the government could also deploy these extra funds towards new policies and initiatives,” said Christian de Guzman, senior vice president, Moody’s Ratings. On Thursday, an S&P Ratings analyst said the extra funds could provide rating support over time if it leads to a full decrease in the deficit. Experts have been factoring in a 0.2% reduction in fiscal deficit, given slippages in revenue collection and additional allocation to expenditures. All three ratings agencies have retained India’s rating with a stable outlook.In its January review, Fitch noted that “implementation of a credible medium-term fiscal strategy, for instance, from further revenue-enhancing reforms, which lowers the general government debt and interest/revenue ratio towards the levels of ‘BBB’ category peers” could affect ratings positively.
