Finance Minister Arun Jaitley committed to fiscal discipline in his
Feb 29 budget, lowering the deficit target further for the fiscal
year that starts next month, but offered little in the way of
reforms investors have been waiting for.
Investors and traders in financial markets have been hoping Reserve
Bank of India Governor Raghuram Rajan will follow soon with a rate
cut, like he did last year.
But the majority of economists polled said he would not repeat the
surprise cut of 25 basis points he delivered just a few days after
last year's budget, with 20 of 28 saying a cut was unlikely before
next month's policy review on April 5.
"Although we doubt the fiscal math, the fact that the government has
been sticking to the stated math, in whatever way they are doing it,
creates room for Rajan to cut rates soon," said Kunal Kundu, India
economist at Societe Generale.
"They will probably bring the fiscal deficit down in a way that is
not desirable, by cutting public capex, but Rajan has indicated that
even if fiscal consolidation leads to lower growth he would still be
OK with it," he said.
Asked what they thought about the fiscal deficit target for the next
fiscal year, nearly two-thirds of the economists said Jaitley was
being optimistic. The rest felt it was about right.
About two-thirds, 17 of 25, also predict the RBI will cut its
benchmark repo rate by 25 basis points to 6.50 percent next month.
Two predicted a deeper 50 basis point cut to 6.25 percent, while six
saw no change.
After an April cut, the RBI is set to ease policy again in the last
quarter of the year, according to the consensus view.
That is a very different outlook from what happened last year, when
the RBI sliced 125 basis points off rates, twice unexpectedly and
Last year's rate cuts came as inflation cooled rapidly around the
world, triggering a wave of similar easier policy from major central
banks. Consumer price inflation in India was 5.7 percent in January.
That exceeds Rajan's inflation target of 5 percent set for March
2017. Coupled with a weakening Indian rupee, predicted to fall to
record lows in the coming 12 months, rising inflation could stall
the RBI's easing cycle.
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There is a roughly one-in-three chance of the rupee falling to 70
per dollar, a Reuters poll of currency strategists showed on
India is set to raise wages by almost 25 percent for its millions of
public sector employees, a once-in-a-decade bonanza that will cost
roughly $16.6 billion dollars, something that economists widely
agree is inflationary.
Despite that extra expenditure, as well as planned outlays on
farming and schemes to guarantee minimum employment for people in
rural areas, Jaitley surprised investors by pledging to cut the
fiscal deficit to 3.5 percent of gross domestic product in the
2016-17 fiscal year.
The RBI, however, is not yet convinced.
A possible source of revenue next fiscal year is sales of government
stakes in public sector companies, the budget says.
But successive governments have had a poor track record selling off
companies and it could be especially hard amid global stock market
Three policymakers aware of the RBI's budget deliberations said they
were combing the numbers to test how Jaitley struck a balance and
whether the impact of the public pay rise had been fully accounted
(Polling by Shaloo Shrivastava, Krishna Eluri and Kailash Bathija;
Editing by Ross Finley and Clarence Fernandez)
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