The stock markets have much to rejoice as the Reserve Bank of India announced a staggering dividend distribution of Rs 2.1 lakh crore for FY24. Frontline indexes had moderate gains on May 23 but quickly reached all-time highs as a result of large increases in banking and financial equities, which were the main beneficiaries of this windfall.

This hefty payout, which doubles the Rs 1.02 lakh crore estimated in the interim budget for 2024, gives the government more money to increase capital investment, reduce the fiscal deficit, or do both at once. Whichever way it goes, market sentiment is already improving.

Banks will benefit from the increased fiscal headroom since it will result in lower government borrowing, which will keep interest rates low. Bank treasury gains might increase with lower rates. In today's trade, the banking and financial services sector led: Nifty Bank (2.1 percent), Nifty PSU Bank (1.94 percent), Nifty Private Bank (1.98 percent), and Nifty Fin Services (1.90 percent). Nifty Auto topped the sectoral gains.

Head of fundamental equities analysis at SBICAPS Securities, Sunny Agrawal believes that more declines in domestic bond rates will support banking stocks, particularly those in the public sector. "Public-sector banks will see their treasury incomes go up," Agrawal stated.

Furthermore, the expected entry of Indian bonds to the global bond index would encourage further investment in the debt market, which will have a beneficial effect on the yield curve. In the following months, we anticipate that the yield on the 10-year government bond will fall below 7%," said Fisdom Research.

This additional dividend enables the government to maintain the public spending engine, which helps capital goods, construction, and infrastructure inventories, as the private sector's capital expenditure investment remains sluggish. It was observed by Kotak Institutional Equities that "the government can continue with its capex thrust by increasing allocations to roads, railways, and defence." The windfall dividend from the RBI makes up almost 11% of the government's current FY25 capital expenditure budget.

Agrawal also emphasized the possibility of lowering income tax rates, which would encourage spending and improve stocks associated with consumption.

The government will find it simpler to accomplish fiscal consolidation and reduce the fiscal deficit in FY25 to less than 5% of GDP, as opposed to the planned 5.1%. This is because of the unexpected bounty. As a result, the government's market borrowing in FY25 will decrease. 

According to Fisdom Research, this will draw FII flows across asset classes by boosting investor trust in the government's budgetary discipline. Furthermore, as per the economists, a stronger fiscal situation will increase investor trust in Indian assets even more and support the country's higher values.