The Reserve Bank is likely to continue with its accommodative stance and may go for a 25 basis points rate cut, an HSBC report says.
In the Budget for 2016-17, the government has stuck to the pre-announced fiscal deficit target of 3.5 per cent of GDP and this move is likely to have a far-reaching impact on the macro economy, according to the global financial services major.
“This was not easy for a government which was trying to protect growth as well as preserve macro stability. Yet, it bit the bullet,” the report added.
The government’s show of fiscal discipline makes it easier for the RBI to continue with its accommodative stance.
HSBC noted that “fiscal outcome makes us more confident on our long-standing call for a 25 bps post budget rate cut by the RBI”.
In February 2 monetary policy review, RBI Governor Raghuram Rajan left the key interest rates unchanged citing inflation risks and growth concerns, while pegging further easing of monetary policy on government’s budget proposals.
The report further noted that the thrust on rural India would also help balance growth contribution from urban and rural sectors and this budget is likely to drive better quality recovery in the economy.
“We continue to expect that GDP will grow 7.4 per cent year-on-year in next fiscal (same as in 2015-16),” HSBC said.
On rupee, the report noted that the combination of high carry and robust fundamentals should better support the domestic unit, especially after its weaker start to the year.
HSBC’s year-end dollar-rupee forecast is 69.