By Swati Bhat
MUMBAI, Aug 27 (Reuters) - Indian bonds edged up to their highest in three weeks while the rupee rose after the Reserve Bank of India (RBI) approved the transfer of a much higher-than-expected dividend to the government, soothing concerns of fiscal slippage.
Finance Minister Nirmala Sitharaman proposed on Friday a series of measures to help the economy and financial markets although some economists said there was a need for an additional stimulus package.
The measures announced so far and others in the pipeline have raised fears the government would expand its fiscal deficit from the targetted 3.3% of gross domestic product, which could lead to an increase in market borrowing.
The surplus transfer, however, has assured investors and markets that there is unlikely to be any fiscal slippage.
The benchmark 10-year bond yield IN072629G=CC was at 6.44%, down 4 bps on the day after having earlier dropped to a low of 6.35%, its lowest since Aug. 7.
"This will mitigate some risks of tax revenue shortfall. Also enable (government) to frontload and accelerate some of its promised spending," said Shubhada Rao, chief economist at Yes Bank.
The decision by a committee specifically set up to look at whether the RBI was holding on to too much of its reserves recommended that it provide the government with 1.76 trillion rupees ($24.62 billion) as a dividend in the central bank's fiscal year that ended June 30.
The amount of transfer this year is more than double the 680 billion rupees that it provided in the previous year.
"They have set a formula for future transfers. It appears to be prudent since the market had lots of calculations. It would be interesting to see what they do with these excess funds," said Paresh Nayar, head of forex and fixed income trading at First Rand Bank.
A source familiar with the discussions said the government will use the funds to stimulate the economy by cutting taxes and providing more money for housing finance companies.
The partially convertible rupee INR=D4 was trading at 71.81/82 per dollar versus its previous close of 72.03 but still off the session highs of 71.70.
"The rupee was up after the surplus transfer, but looking at the global scenario, we cannot remain isolated in case of a global risk-off," said the head of currency trading at private bank.
Investors are keenly awaiting more measures from the government to prop up the flagging economy which is likely to have expanded at its slowest pace in more than five years in the April-June quarter, driven by weak investment growth and sluggish demand.
The GDP data is due to be released at 1200 GMT on Friday.
"It will be interesting to track the government's follow-up measures to support growth, as indicated last week," Upasana Chachra, economist with Morgan Stanley, wrote in a note.
"In our view, a big fiscal stimulus is still a low-probability event. The government is likely to continue its calibrated response".
(Editing by Jacqueline Wong)
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