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2 Feb 2016
RBI waits for the budget – RBS
FXStreet (Delhi) – Vaninder Singh, Economist at RBS, notes that the RBI at its meeting today left the repo rate unchanged at 6.75%, in line with expectations while the Cash Reserve Ratio (CRR) at 4.00% was also not moved.
Key Quotes
“The central bank noted in its statement that it will have more space to ease if inflation pans out as it expects, and if the FY2017 budget (April 2016 to March 2017) maintains fiscal rectitude.
However, we worry that it will be difficult for the government to reduce the fiscal deficit to 3.5% of GDP in FY17, as required by the Fiscal Responsibility and Budget Management (FRBM) Act. A number of additional spending outlays are likely to pressure the fiscal accounts in the coming year, including: (1) increase in public sector wages and pensions1, (2) recapitalisation of state-owned banks, (3) increase in capital spending, and (4) higher food procurement prices.
There are, unfortunately, no major offsets available either for expenditure reduction or revenue enhancement. Please see Top View | India | Rising vulnerabilities, 18 January 2016 for more details.
The monetary authority has also not fully factored the public sector wage revision into its forecasts. In line with previous pay revisions, if the government fully implements the Pay Commission changes, the measures are likely to boost consumption.
Overall, our read, reinforced by the post-meeting press conference, is that a great deal depends on the budget announcement, currently scheduled for 29 February. If the budget proves favourable, we expect the RBI to cut rates by 25bp in an off-cycle meeting, as done last year.”
Key Quotes
“The central bank noted in its statement that it will have more space to ease if inflation pans out as it expects, and if the FY2017 budget (April 2016 to March 2017) maintains fiscal rectitude.
However, we worry that it will be difficult for the government to reduce the fiscal deficit to 3.5% of GDP in FY17, as required by the Fiscal Responsibility and Budget Management (FRBM) Act. A number of additional spending outlays are likely to pressure the fiscal accounts in the coming year, including: (1) increase in public sector wages and pensions1, (2) recapitalisation of state-owned banks, (3) increase in capital spending, and (4) higher food procurement prices.
There are, unfortunately, no major offsets available either for expenditure reduction or revenue enhancement. Please see Top View | India | Rising vulnerabilities, 18 January 2016 for more details.
The monetary authority has also not fully factored the public sector wage revision into its forecasts. In line with previous pay revisions, if the government fully implements the Pay Commission changes, the measures are likely to boost consumption.
Overall, our read, reinforced by the post-meeting press conference, is that a great deal depends on the budget announcement, currently scheduled for 29 February. If the budget proves favourable, we expect the RBI to cut rates by 25bp in an off-cycle meeting, as done last year.”