The Reserve Bank of India is unlikely to cut rates further as consumer price inflation has eased and the government has revised its fiscal deficit target, according to Anthony Chan, Asian sovereign strategist in AB’s global economic research unit.
In his budget presentation, India’s finance minister Arun Jaitley pegged the fiscal deficit target at 3.9% for 2015-16 compared to 3.6% targeted earlier.
Also, the minister said the government will be able to meet its fiscal deficit target of 3% in three years rather than the two years envisaged previously.
Accordingly, he set the fiscal deficit targets at 3.5% for 2016-17 and 3.0% for 2017-18.
“With fiscal consolidation softening — especially in the coming year — we think there is less reason for the Reserve Bank of India to slash policy rates further after cutting rates by 25 basis points recently,” Chan said.
“We expect the central bank to stay put for now, especially since consumer price inflation, currently running at 5% year-on-year, seems to be already hitting the bottom.”
The RBI slashed the repo rate — the rate at which commercial banks borrow from the RBI — by 25 basis points on March 4, a few days after the government presented its union budget. This brings the total rate cut to 50 basis points since January.
Low commodity price risk
The investment manager said it has a positive outlook for Indian sovereign bonds as the government’s recent budget is supportive of economic growth, which could potentially increase the chances of an upgrade in its sovereign credit rating.
“Despite the slow fiscal reform process, the impact on sovereign credit should be somewhat more positive. In our view, the policy direction is on the right track, which has reduced the chances of a downgrade to India’s sovereign credit rating and increased the likelihood of an upgrade over the medium term.”
Alliance Bernstein believes the government’s gradual approach to reduce the fiscal deficit, is a step in the right direction even as it failed to meet the market’s high expectations on fiscal consolidation.
The budget seeks to strikes a balance between fiscal consolidation and promoting economic growth, the firm said.
However, any shift in the current low energy and food prices could act as a deterrent in achieving the fiscal path.
“Currently, low oil prices and food inflation offer an opportunity to the government to toughen its fiscal plan…But if the energy and food cycles turn swiftly and prices rise again, we believe that a great opportunity for structural reforms may be lost.”
