Gains in sovereign Indian bonds proved fleeting on Tuesday as closer analysis of a record transfer from the central bank to the government proved that the payout isn’t actually that big.

Read more: The math behind RBI’s Rs 1.76 lakh crore surplus transfer to the Central Government

Of the ₹1.23 lakh crore dividend ($17.2 billion) announced late Monday, the Reserve Bank of India had already paid ₹28,000 in February. Moreover, some of that would have accrued as interest income on the central banks purchase of sovereign bonds, which means its just a to-and-fro transfer of cash from the government to the RBI and back. A transfer of some ₹52,600 of surplus capital is being seen as much lower than the markets expectations of as much as ₹2 lakh crore.

Read also - Surplus bonanza: RBI to transfer ₹1.76-lakh crore to government

The actual gain to the government will be just around ₹58,000 crore from the dividend and surplus capital, Kotak Institutional Equities estimates.

The point here is that the one-time capital transfer is quite nominal, much lower than the lower bound of the market expectation, said Suyash Choudhary, head of fixed income at IDFC Asset Management Co. The bigger point is whether they use it for fiscal consolidation or they use it partly for fiscal stimulus. If there is an additional stimulus program, then the market will continue to worry about meeting the fiscal deficit target.

Sovereign bonds erased gains on Tuesday. The yield on the benchmark 10-year note rose five basis points to 6.53 per cent after dropping as low as 6.35 per cent earlier. Yields have climbed more than 20 points in the past three weeks amid concerns of higher government borrowing.

Optically, the excess provision transfer will seem positive for bonds, said Suvodeep Rakshit, an economist at Kotak Institutional Equities Ltd. in Mumbai. Fiscal slippage risks remain given the expectation of revenue shortfall, and those risks will continue to weigh on yields.

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