The new Indian government will receive a $25 billion check from the central bank, enabling it to either increase spending or reduce the fiscal deficit more quickly, both of which will be welcomed by investors.
On Wednesday, the Reserve Bank of India (RBI) announced the transfer of 2.11 trillion rupees in dividends to the government, a figure more than double that anticipated by New Delhi and the market, leading to a drop in bond yields and a rise in stock markets.
Samiran Chakraborty of Citi Research stated that this surplus could help the incoming government, after the current election ends, reduce its fiscal deficit by 0.3% of GDP, increase infrastructure spending, or introduce "populist" stimulus measures.
Chakraborty said, "The bond market might prefer the government to opt for deficit reduction, while the stock market might favor increased spending."
During the campaign, the opposition Congress party promised annual cash benefits of 100,000 rupees ($1202.07) to poor women and unemployed youth. The party's star campaigner, Rahul Gandhi, also pledged to waive farm loans.
However, Prime Minister Narendra Modi of the Bharatiya Janata Party (BJP) refrained from promising any new major welfare measures.
Shreya Sodhani, an economist at Barclays, commented, "Despite the increase in RBI dividend income, if the government is BJP-led, we doubt that the government will opt for more populist spending in the budget."
"Even in an election year, the incumbent government has not shown an inclination towards populist spending."
In the final budget before the general elections, the BJP-led government resisted the temptation to spend trillions of rupees on poverty programs while tripling infrastructure spending to 11.11 trillion rupees in 2019.
