The Union Budget’s push for fiscal consolidation is likely to make it easier for the Reserve Bank of India to strengthen the liquidity situation and cut rates this year.
In the Interim Budget, Finance Minister Nirmala Sitharaman opted for fiscally tight measures, signaling a focus on fiscal consolidation rather than populist initiatives ahead of the next 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 quest to meet inflation targets. Ideally, the central bank can find little justification for delaying the easing of its liquidity stance, especially since inflation has consistently fallen below its most recent projections. However, determining whether this adjustment occurs quickly or in April remains uncertain. However, the degree of fiscal compression and its potential influence on regulating aggregate demand has significant ramifications for the RBI as it considers potential easing within its existing monetary policy framework.
Cheaper home loans?
Also, there are indications that the Budget could bring relief to the common man in India, especially in terms of making home loans more affordable, given the government’s announcement to help the middle class buy homes.
The Finance Minister launched two affordable housing schemes, with an increased target of two crore houses under the Pradhan Mantri Awas Yojana-Gramin. In addition, 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 decline in real interest rates and an increase in private investment – a phenomenon known as the “crowd-in” of private investment.
The Budget’s measures, such as the remarkable 11.1% increase in capital expenditure and the decision to resist populist schemes, are seen as anti-inflationary. This stance is expected to make the RBI’s task easier, potentially paving the way for future rate hikes.
The reduced borrowing and lower fiscal deficit are seen as creating wiggle room for the RBI’s rate setting panel to ease policy rates in the coming months. Economists at research firm Nomura predict that fiscal policy will complement monetary policy, given the government’s commitment to fiscal consolidation, the quality of consolidation and lower market lending. Nomura expects a big 100 basis point (bps) of rate cuts starting in August, with the possibility of an earlier taper 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.