“Room for RBI rate cut opens up, as early as in the April 2016 policy meeting, following government sticking to both FY16 and FY17’s fiscal deficit target. Additionally, the ongoing supply pressure in bond market is likely to ease in the near term- as government budgets for net borrowing of INR 4.25 trn in FY17 via dated securities (compared to INR 4.41 trn FY16 RE). This along with intent of enacting Insolvency and Bankruptcy Code is likely to benefit domestic bond market outlook as well as have salutary positive impact on currency.
Closer look at the fiscal arithmetic suggests that government continues to be optimistic in its outlook – projecting a 11% growth for FY17 (nominal) against global slowdown. On the revenue front, reliance on high double digit growth in income tax, big ticket non tax revenue may warrant caution- proceeds from spectrum sale is budgeted at INR 990bn while total proceeds from disinvestments and strategic sales is expected to earn INR 565bn.
Although budget FY17 stuck to the road map presented earlier, it has announced constitution of a committee to review the implementation of the FRBM act with a view to make it more dynamic and counter cyclical. This will give government more elbow room to undertake growth boosting measures while adhering to fiscal discipline. Consequently, fiscal targets and its implementation during upcoming years may undergo a change. The union budget FY17, has also provided the structure of monetary policy committee with 3 members each from government and RBI. RBI governor will have the deciding vote in case of a tie. Ind-Ra believes while this arrangement will facilitate the two way flow of thinking and result in a better synchronization of monetary and fiscal policy, it will also protect the supremacy of RBI in case of monetary policy.”
(The views expressed are of Soumyajit Niyogi, Associate Director – Credit & Market Research Group, India Ratings & Research)
