Modi’s budget gift for farmers, middle class may prevent RBI from cutting interest rates

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New Delhi | Updated: February 5, 2019 10:28:20 AM

A larger market borrowing, besides making Reserve Bank of India’s job difficult, will result in a higher bond yield in FY20,” noted the report.

More money in pocket of consumers increases the potential upside risk to inflation.

With the Narendra Modi government’s last budget being a populist one ahead of the 2019 Lok Sabha election, RBI will likely find it difficult to cut interest rate in its upcoming monetary and credit policy later this week, even as it may ease the policy stance, India Ratings said.

RBI may change its monetary stance from calibrated tightening to neutral, however, the dynamics of a rate cut becomes a difficult exercise more so under the evolving global situation, India Ratings said.

The interim budget 2019 presented by the Modi government included various fiscal sops for the farmers and middle class. The government has failed to meet its fiscal deficit for the fourth consecutive year, with the fiscal deficit target for FY 2018-19 slipping 10 bps to 3.4 per cent. Further, the government has set the fiscal deficit target for the next year 2019-20 too at 3.4 per cent.

“Gross borrowing in FY20 is budgeted to grow 33.1% (FY19: compression of 9.3%). However, net market borrowing is budgeted to grow at 11.9% in FY20 (FY19: compression of 6.2%). A larger market borrowing, besides making Reserve Bank of India’s job difficult, will result in a higher bond yield in FY20,” noted the report.

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More money in pocket of consumers increases the potential upside risk to inflation. This may deter RBI from cutting the interest rate in its upcoming bi-monthly Monetary Policy Report, said Akhil Mittal, senior fund manager of Tata Mutual Fund Manager, speaking to The Indian Express. Moreover, the revenue targets, particularly on GST collections and disinvestment look quiet stretched and optimistic, he added.

Experts expect RBI to wait till the post election budget comes up to have clear medium term outlook, while deciding the possibility of a rate cut. Further, the global growth and the trajectory of oil prices would also affect the decision.

Arvind Chari, head, Fixed Income & Alternatives, Quantum Advisors also told The Indian Express that he expects the interest rate to remain unchanged, in view of the potential inflationary nature of the budget.

The central bank in its last Monetary Policy had maintained its interest rate to 6.50 per cent while forecasting that the inflation will pick up again to 3.8-4.2 per cent in the first half of the 2019-20. Urjit Patel, former RBI governor also pointed out that any change in the monetary policy would depend on more robust inflation signals and data points.

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