The RBI's MPC meets once in two months to take decisions on key rates. Repo Rate and CRR, which aims to keep inflation close to the target of 4% while balancing economic growth. The repo rate is the rate at which the RBI lends to banks. A cut in the repo rate makes it cheaper for banks to borrow, hence reducing loan rates and hence lower EMIs.
Before the election results, there was speculation in the bond market that the central government could reduce the fiscal deficit substantially after receiving a record-high surplus dividend from the RBI. However, the actual results present a different scenario.
Fiscal math
“Political stability will help ensure continuity in the policy agenda, but we see a risk of a populist bias in a third term targeting the lower income groups and a change in economic policy dynamics as well as pushing for tougher reforms,” Tanvi Gupta Jain, economist at UBS Securities, told ET. “In the upcoming Budget (in July), our base case is that the government sticks to the medium-term fiscal consolidation roadmap, but with a populist bias,” she added.
This was not expected to be included in RBI's upcoming policy statement on June 7. Rate cutsBut the Centre’s ability to make significant progress towards fiscal consolidation and reducing borrowing would have given the central bank reassurance about the state of overall demand in the economy.
The reaction in India's overnight indexed swap market on Tuesday suggested interest rate cuts are less likely in 2024, as traders consider the potential inflationary impact of rising public spending.
“The BJP will rely on regional allies like the Telugu Desam Party and the Janata Dal (Secular) and make policy adjustments accordingly. Second, there will be greater demand from both the BJP and allies to stimulate consumption in the economy,” said Madhavi Arora, chief economist at Emkay Global Financial Services.
However, the government has a significant fiscal cushion as the RBI has transferred a surplus of Rs 2.11 lakh crore to the government, more than double the amount budgeted as dividends from the central bank and PSU institutions. This allows the government to spend more to boost consumption in the economy, if necessary, without severely disrupting the fiscal balance.
“The government already has Rs 1 lakh crore of surplus revenue that can be used in different ways. I don't think there is any major conundrum for the government,” said Madan Sabnavis, chief economist at Bank of Baroda. “Assuming there were no constraints, the government could have probably targeted a fiscal deficit of 4.9% this year instead of 5.1%, but I don't think there is any hurry to do so right now because we are on a prudent path of gradually getting back to 4.5%,” he added.