The Union Budget’s thrust on fiscal consolidation is likely to make it easier for the Reserve Bank of India to shore up the liquidity situation and cut rates this year.
In the Interim Budget, Finance Minister Nirmala Sitharaman opted for fiscally strict measures, signalling a focus on fiscal consolidation rather than populist measures ahead of the upcoming General Elections in the summer of 2024.
The immediate signal of fiscal consolidation offers considerable reassurance to the Reserve Bank of India (RBI) in its pursuit of achieving inflation targets. Ideally, the central bank may find little justification to postpone the relaxation of its liquidity stance, particularly as inflation has consistently fallen below its most recent projections. However, determining whether this adjustment occurs promptly or in April remains uncertain. Nevertheless, the degree of fiscal compression and its potential influence on regulating overall demand hold significant consequences for the RBI as it considers potential easing within its existing monetary policy framework.
Cheaper home loans?
Also, there are indications that the Budget might bring relief to the common man in India, particularly in terms of making home loans more affordable, given the government announcement for helping the middle class to buy homes.
The Finance Minister introduced two affordable housing schemes, with an increased target of two crore houses under the Pradhan Mantri Awas Yojana-Gramin. Additionally, a new scheme aimed at middle-class households, facilitating the purchase or construction of their own houses, was announced.
The government’s emphasis on fiscal consolidation in the budget is likely to benefit the economy in various ways. The FY25 fiscal deficit target set by the central government is nearly Rs 1 lakh crore lower than analysts’ expectations. Lower government borrowing reduces competition for limited savings in the economy, potentially leading to a decrease in real interest rates and an increase in private investment—a phenomenon known as “crowding-in” of private investment.
The Budget’s measures, such as the notable 11.1% increase in capital expenditure outlay and the decision to resist populist schemes, are viewed as anti-inflationary. This stance is expected to make the RBI’s task easier, potentially paving the way for future rate cuts.
The reduced borrowing and lower fiscal deficit are seen as creating headroom for the rate-setting panel of the RBI to ease policy rates in the coming months. Economists at research firm Nomura anticipate that the fiscal policy will complement monetary policy, given the government’s commitment to fiscal consolidation, the quality of consolidation, and lower market borrowing. Nomura expects a substantial 100 basis points (bps) of rate cuts starting from August, with the possibility of earlier easing in June. This move is seen as a positive step that could not only facilitate easier access to credit but also contribute to making home loans more affordable for the general population.