The government’s commitment to fiscal consolidation in the Budget will help the Reserve Bank adopt an accommodative monetary stance, but a rate cut is more likely in April than in policy review meet next week, says a report. According to global financial services major Citigroup, the RBI’s timing remains uncertain, but the possibility of a 25 bps rate cut is high in the near-term.
“Lower-than-feared fiscal deficit target and smaller market borrowing are positive for rates,” Citigroup said in a research note, adding “the room for rate easing is limited – 25 bps cut more likely in April than in the February policy”.
On December 7, the central bank kept interest rate unchanged despite calls for reducing it and also lowered the economic growth projection by half a percentage point to 7.1 per cent in the first policy review post demonetisation.
The central bank will hold its next monetary policy meet on February 8.
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The Budget pegged the fiscal deficit at 3.2 per cent of GDP in 2017-18, as against 3.5 per cent in 2016-17.
Going forward, the Fiscal Responsibility and Budget Management (FRBM) committee has suggested making debt-to-GDP ratio the most important metric and wants it to be brought down to 60 per cent of GDP by 2023.
“The better than feared deficit target and commitment to fiscal consolidation will keep hopes of a RBI rate cut alive,” the Citigroup report said adding “the Budget reinforces our view of another 25 bps cut in repo rate”.