The Union Budget 2023-24 announced by Finance Minister Nirmala Sitharaman has given the Reserve Bank of India (RBI) a bit of a breather. By sticking to a fiscal consolidation road map—where the Budget announced a fiscal deficit target of 5.9 per cent for FY24, and the intent of sticking to the glide path of an under-4.5 per cent deficit by FY26—the Budget has given some cause for the RBI not to worry about the deficit and its impact on inflation.
As the Monetary Policy Committee (MPC) of the RBI sits to deliberate on February 6, and announce its decisions on February 8, the backdrop provided by the Union Budget assumes great significance. The Budget, importantly, does not pander to populist sentiments by way of giveaways, and focusses on a big capital expenditure push like earlier years, increasing public capex by a hefty 33 per cent to ₹10 lakh crore, while total expenditure is expected to increase by 7.5 per cent.
Madan Sabnavis, Chief Economist of the Bank of Baroda, correctly points out that the Budget also “rightly balances” the mix of financing the fiscal deficit by not inflating the gross borrowing numbers, and relying on an increase in the small savings inflows. He does not expect any upside pressure on yields as of now.
Coming back to the MPC meeting, the broad consensus that seems to be emerging—also keeping in mind the US Fed’s recent decision of hiking rates by another 25 bps—is of another 25-bps repo rate hike to end this round of rate hikes and bring the repo rate to 6.50 per cent. FM Sitharaman has also recently echoed this view that with inflation easing, the pressure on the RBI to keep increasing rates is now less.
Consumer price inflation has fallen three months in a row, and the December figure of 5.7 per cent, within the upper end of the RBI’s tolerance limit of 6 per cent, will give considerable comfort to the MPC as it meets to decide policy. Barclays Chief Economist Rahul Bajoria is of the view that the conditions are supportive for the RBI to deliver one more rate hike and retain the option of pausing thereafter.
While the International Monetary Fund (IMF) has forecast India’s inflation levels to decline to 5 per cent in 2023 and then to 4 per cent in the following year, for now the effects of the rate hikes—though in smaller doses—by central banks in the developed economies will play a role in RBI’s decision. Bajoria has pointed out that Asian central banks have already begun to pause or signalled a desire to take a breather from rate hikes as growth takes a hit. With the Union Budget aiming to push growth by way of government capex, in the hope that it will “crowd in” private investments further, RBI may also want to lend a hand to the government’s growth push by ending the rate cycle after a small hike in February.
But as economists point out, there could be a difference of views in the MPC over whether another rate hike is necessary. As evidenced in the last MPC meeting, at least two of the six MPC members may not agree with the reasoning for another rate hike in the current circumstances.
Importantly, it may fall on the experienced shoulders of RBI Governor Shaktikanta Das to guide the MPC in taking a final call on rates on February 8. The spectre of inflation is far from gone, and that factor will likely be a subject of intense discussion at the meeting. But economists like Bajoria feel that even if a 25-bps rate hike was to be announced, it should be accompanied by a clear signal of a pause in the future, with the policy stance being changed to “neutral”.
Whatever be the announcement on February 8, it is clear that RBI will have some room to soften its stance from the aggressive rate hike cycle it has been on ever since May 2022. Whether a 25-bps hike or a pause, or even a signal of a pause, it could be good news for the government as it aims to push growth. Rate cuts, however, could be a long time coming.
The writer is Editor, Business Today.