The government’s decision to push the glide path for achieving 3% fiscal deficit target would weigh on the monetary policy committee (MPC) of the Reserve Bank of India (RBI) when it meets next week to discuss the last monetary policy of the financial year, which will also be the first under the new Governor Shaktikanta Das.
In the Budget speech, Finance Minister Piyush Goyal revised the fiscal deficit target for 2018-19 to 3.4% from 3.3%.
He said it would be 3.4% in FY20, too.
“We have maintained the glide path towards our target of 3% of fiscal deficit to be achieved by 2020-21,” Mr. Goyal said.
Originally, the target was to reach a fiscal deficit of 3.1% of GDP by March 2020, and 3% by March 2021.
At a time when retail inflation — the main yardstick of RBI for policymaking purpose — has fallen to an 18-month low of 2.2%, there is a case for the central bank to lower the interest rate and change stance to ‘neutral’.
In the wake of the development on the fiscal deficit front, the RBI may now opt for status quo.
“The government presented an expansionary budget and prioritised populism over fiscal prudence,” research analysts at Nomura said in a note to its clients.
“The deviation from the FY19 fiscal deficit target and the “pause” on FY20 fiscal consolidation is a negative surprise, relative to our expectations,” it said.
“The expansionary fiscal impulse, at the margin, negates the need for the RBI to consider monetary easing at this stage,” Nomura said in the note adding that the MPC could keep the rate unchanged though the stance could change to neutral from calibrated tightening.
The gross borrowing programme of ₹7.1 lakh crore has also dampened the sentiments in the bond market as yields had hardened.
“The key focus among other things for bond markets is the fiscal math.
“While the fiscal deficit as percentage of GDP has been pegged at 3.4%, the gross borrowing programme of ₹7.10 lakh crore has spooked market sentiments,” said Lakshmi Iyer, chief investment officer (debt) and head of products, Kotak Mahindra Asset Management Company.
The yield on the 10-year benchmark government bond rose to 7.61%, rising 13 basis points from its previous close. “For now, we expect bond yields to remain at current elevated levels with sideway movement till MPC meeting slated for next week offers some clarity,” she added. The rupee also weakened by 17 paise to close at 71.25 against the dollar on concerns over fiscal slippage.