India’s central bank will wait a month to cut interest rates again, according to economists in a Reuters poll who mostly said New Delhi’s latest fiscal deficit target looked optimistic.
Finance Minister Arun Jaitley committed to fiscal discipline in his Feb 29 budget, lowering the deficit target further for the fiscal year that starts next month, but offered little in the way of reforms investors have been waiting for.
Investors and traders in financial markets have been hoping Reserve Bank of India Governor Raghuram Rajan will follow soon with a rate cut, like he did last year.
But the majority of economists polled said he would not repeat the surprise cut of 25 basis points he delivered just a few days after last year’s budget, with 20 of 28 saying a cut was unlikely before next month’s policy review on April 5.
“Although we doubt the fiscal math, the fact that the government has been sticking to the stated math, in whatever way they are doing it, creates room for Rajan to cut rates soon,” said Kunal Kundu, India economist at Societe Generale.
“They will probably bring the fiscal deficit down in a way that is not desirable, by cutting public capex, but Rajan has indicated that even if fiscal consolidation leads to lower growth he would still be OK with it,” he said.
Asked what they thought about the fiscal deficit target for the next fiscal year, nearly two-thirds of the economists said Jaitley was being optimistic. The rest felt it was about right.
About two-thirds, 17 of 25, also predict the RBI will cut its benchmark repo rate by 25 basis points to 6.50 percent next month. Two predicted a deeper 50 basis point cut to 6.25 percent, while six saw no change.
After an April cut, the RBI is set to ease policy again in the last quarter of the year, according to the consensus view.
That is a very different outlook from what happened last year, when the RBI sliced 125 basis points off rates, twice unexpectedly and in-between meetings.
Last year’s rate cuts came as inflation cooled rapidly around the world, triggering a wave of similar easier policy from major central banks. Consumer price inflation in India was 5.7 percent in January.
That exceeds Rajan’s inflation target of 5 percent set for March 2017. Coupled with a weakening Indian rupee, predicted to fall to record lows in the coming 12 months, rising inflation could stall the RBI’s easing cycle.
There is a roughly one-in-three chance of the rupee falling to 70 per dollar, a Reuters poll of currency strategists showed on Thursday.
India is set to raise wages by almost 25 percent for its millions of public sector employees, a once-in-a-decade bonanza that will cost roughly $16.6 billion dollars, something that economists widely agree is inflationary.
Despite that extra expenditure, as well as planned outlays on farming and schemes to guarantee minimum employment for people in rural areas, Jaitley surprised investors by pledging to cut the fiscal deficit to 3.5 percent of gross domestic product in the 2016-17 fiscal year.
The RBI, however, is not yet convinced.
A possible source of revenue next fiscal year is sales of government stakes in public sector companies, the budget says.
But successive governments have had a poor track record selling off companies and it could be especially hard amid global stock market turmoil.
Three policymakers aware of the RBI’s budget deliberations said they were combing the numbers to test how Jaitley struck a balance and whether the impact of the public pay rise had been fully accounted for.