Interest rates are likely to remain firm in the near to-medium-term even though the Finance Minister has set an ambitious fiscal deficit target for 2014-15.
“Fiscal deficit target for the next year appears ambitious as also irrelevant,” said Swapnil Pawar, Chief Investment Officer, Karvy Capital. Owing to the spending during elections, food inflation may continue to stay high.
According to Mr. Pawar, interest rates are unlikely to come down in the next few months, although a further hike also looks unlikely given the recent cool-off in inflation and likely stance of the Reserve Bank of India (RBI) to wait for its previous tightening [measures] to take effect.
Plan expenditure“Any government will come to power, their Plan expenditure will shoot up to pump-prime the economy and the target of 4.1 per cent for next financial year is very tough to achieve,” said Sonam Udasi, Senior Vice-President and Head, Research, IDBI Capital Markets. According to him, inflation number will move up in April-May, mainly because of election spending. “Next six months, interest rates will remain elevated, and we are likely to witness a status quo in interest rates in the next few months.”
The RBI Governor, Raghuram Rajan, had already indicated that consumer price index (CPI) is his benchmark.
At present, the CPI-based inflation hovers around 8.7-8.8 per cent. Further, inflation will come down only when supply constraints are removed, “that’s the only way to bring down interest rates,” Mr. Udasi added.
The most awaited event for the financial markets before the close of this financial year was the update on the path of fiscal consolidation by the Finance Minister in the Interim Budget.
However, “there are doubts with regard to credibility of the 4.8 per cent fiscal deficit announced for 2013-14 as it involved deferring of fuel subsidy of Rs.35,000 crore to next year, interim dividends of Rs.14,000 crore in current fiscal, which would have otherwise come in 2014-15, and a significant cut in planned expenditure which ultimately has impact on growth,” pointed out Arun Khurana, Head, Global Markets Group, IndusInd Bank.
