New measures to tame inflation unlikely to divert RBI from its monetary tightening: Barclays

While the recent fiscal measures could help cool down price increases and modestly reduce pressure on the Reserve Bank of India (RBI) to take front-loaded rate hikes, they are unlikely to be sufficient to divert the central bank from its path of monetary tightening, according to a Barclays report.

The measures include ₹8/litre and ₹6/litre tax cuts on petrol and diesel, respectively, ₹200 subsidy on cooking gas for poor households, and a reduction of import duties on raw materials and intermediaries of plastics, iron and steel, meaning that the overall fiscal deficit likely to exceed the budgetary estimates by at least ₹2 lakh crore, the report said.

“We revise up our fiscal deficit for FY23 to 6.9 per cent, from government budget estimate of 6.4 per cent,” said Rahul Bajoria and Sri Virinchi Kadiyala of Barclays Investment Bank.

The Barclays economists continue to expect the RBI to deliver a 50 basis point (bp) policy-rate hike at its June meeting and to raise the rate to 5.15 per cent by August, before assessing macroeconomic momentum and gauging the need for further hikes.

They also believe the RBI will look to reduce liquidity in a calibrated manner, and may deliver another cash reserve ratio (CRR) hike of 50bp at the next MPC (monetary policy committee) meeting, but applicable only from a later date.

“Still, a front-loaded rate-hiking cycle does not imply a long tightening cycle, as the policy rate approaching 5.15 per cent by the end of Q3 22 would see the MPC meeting the key milestone of unravelling pandemic-era accommodation -- returning to pre-Covid-19 levels of interest rates.

“That may provide some room for the central bank to reassess its policy stance, and indicate that the bar for further tightening would be higher,” the economists said.

The report noted that the new fiscal measures could play a key role in easing price pressures.

“We estimate the motor-fuel tax cuts could shave at least 20bp off headline CPI, while the subsidy on gas cylinders could lop 26bp off consumer inflation , but spread over May and June.

“Follow-up tax cuts announced by state governments could also help in reducing the price burden on consumers,” the economists said.

Moreover, the import duty cuts on intermediate goods such as plastics, steel and iron, and supply-side measures to reduce the price of cement are likely to help in reduce latent price pressures in the economy.

Overall, Barclays has estimated an incremental fiscal shortfall of ₹4 lakh crore for the government. However, stronger growth and conservative budgetary estimates mean the government could see a revenue upside of at least ₹1 lakh crore.

“We also envisage the government cutting capital expenditure by ₹1 lakh crore this year.

“As a result, the overall fiscal deficit is likely to still exceed budgetary estimates by ₹2 lakh crore, which would mean a shortfall for FY22-23 to 6.9 per cent of GDP from the budgetary estimate of 6.4 per cent GDP,” the report said.

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