Hopes of rate cut evaporate after political mandate

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After the poll results, the economy reality check. A few analysts have expressed doubt whether the Reserve Bank of India would be in a position to move towards a rate cut in the foreseeable future given the new constraints of coalition politics that the election results have thrown up on June 4.

“While political stability should help ensure continuity in policy agenda, we see risk of populist bias in the third term targeted towards lower income strata and change in economic policy dynamics with tougher reforms getting pushed further out. In the upcoming budget (in July), our base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias,” Tanvee Gupta Jain, economist, UBS Securities told The Economic Times.

“The BJP will be dependent on regional allies like Telugu Desam and Janata Dal (Secular) and make policy adjustments accordingly. Second, there will be greater demand to stimulate consumption in the economy from both the BJP and allies,” said Madhavi Arora, lead economist at Emkay Global Financial Services.

The RBI has kept the repo rate unchanged from June 2023. The central bank had hiked the rate from 4% in May 2022 to 6.50% in June 2023 and has held it at that level since.

One of the reasons that has prevented RBI from bringing down the interest rate was but now the election results have ushered in the possibility of a new factor – a new fiscal landscape that could be driven by populist spending.

After the exit polls last week led many to believe that there would be continuity, analysts began speculating whether a record Rs 2.11 lakh crore dividend to the Centre by RBI would allow the government to bring down the fiscal deficit and move towards less borrowing. But the poll results have brought forward a different reality.

The RBI would present a new monetary policy statement on June 7. Though none expected a rate cut this time, fiscal consolidation and reduction in borrowing would have allowed the bank room for comfort on aggregate demand conditions in the economy.

But now, analysts indicate that more public spending could trigger inflationary impact.

The huge transfer of funds from the RBI to the government offers some sort of an elbow room. It is more than double the amount that was accounted for in the Union budgeted from the RBI. Analysts said this amount might allow the government to spend more without disturbing the fiscal situation.

The chief economist of Bank of Baroda, Madan Sabnavis, told the newspaper, “The government already has Rs 1 lakh crore of additional income which can be used in different ways. I don’t think there is a major conundrum for the government. Let’s assume that there were no constraints at all, the government could have probably targeted a 4.9% fiscal deficit this year instead of 5.1%, but I don’t think there is a rush to do it right now because we are following the prudential path of gradually going back to 4.5%.”