A host of measures to increase disposable income and consumption demand have been announced in the Interim Budget, but inflationary worries are still low. According to analysts, the Reserve Bank of India is unlikely to increase rates immediately.

The RBI is set to announce its sixth bi-monthly monetary policy for 2018-19 on February 7. In its last policy in December, it had projected inflation at 3.8 per cent, against 4.2 per cent in the first half of the fiscal, with risks tilted to the upside while maintaining a status quo for rates. Since then retail inflation has eased to an 18-month low of 2.19 per cent in December and the market has been expecting a continued pause, if not a rate cut.

Interim Finance Minister Piyush Goyal’s announcement of a direct income support of ₹6,000 annually to farmers is likely to boost consumption demand in rural areas. The proposed measures on income tax, including exemption for persons with gross taxable income of up to ₹5 lakh, and tax benefits in the real estate and housing sector is set to increase disposable incomes.

“I don’t see a major impact on inflation expectations as capacity utilisation has still not peaked. We see a continued rate pause for some time by the RBI to support growth,” said Ranen Bannerjee, partner and leader, public finance and economics, PwC India.

Fiscal slippage

However, a concern, which the RBI and the Monetary Policy Committee is also likely to highlight is the fiscal slippage. The Centre has pegged its fiscal deficit in the Revised Estimate at 3.4 per cent for 2018-19 as against 3.3 per cent in the Budget Estimate and at 3.4 per cent for 2019-20 compared to earlier plans of lowering it to 3.1 per cent. In its initial comments on the Budget, Moody’s has said the continued slippage in fiscal deficit is credit negative for the sovereign and does not bode well for medium-term fiscal consolidation. The Finance Ministry is also not expecting any significant spike in inflation this fiscal and expects nominal GDP growth at 12.3 per cent and at 11.5 per cent next fiscal. “The slight dip of 0.8 per cent in GDP growth is anticipated on account of the inflation stabilising at the targeted rate of 4 per cent,” said the Budget documents.

Madhavi Arora, Economist, FX and Rates- Edelweiss Securities, said the MPC is likely to view the Budget projections cautiously amid skewed fiscal impulse towards consumption, which could be inflationary. “We retain our view that MPC will change its stance to neutral by February and sustained lower inflation would open up space for 25-50 bps easing in the first half of 2019-20,” she said.

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