Budget 2021 has come and gone and now the work of Reserve Bank of India (RBI) is cut out. The RBI will come out with its Monetary Policy statement on February 5.
CNBC-TV18's very own MPC, which boasts of eminent members - Pronab Sen, Former Chief Statistician; Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI; Sajjid Chinoy, Chief India Economist at JPMorgan; Samiran Chakraborty, Chief Economist at Citi; and Sonal Varma, India Chief Economist at Nomura believe that the RBI will maintain a status quo.
On the 9.5 percent fiscal deficit number for FY21 announced by the finance minister in the Budget, Sen said that he believes it to be just cleaning up act.
“The government had gotten into the habit of not paying its bills. It would take 6-7 months before they paid last year’s bills. What I think they have done is, they have cleaned up that act; they are trying to correct that. So, what it does in effect is that this 9.5 percent essentially is just a cleaning up act and what it is saying in effect is without any significant increase in government expenditure because you are now bringing everything onto the Budget rather than having it as EBR, your fiscal deficit is going to look larger. In terms of the real economic effect, I don’t think there is going to be any great change at all,” he said.
Sonal Varma, India Chief Economist at Nomura believes that MPC will be more concerned about growth impulses that will come through from the Budget.
“From the MPC’s perspective, it is more about the growth impulses that will come through from the fiscal -- the Budget that has been laid down. While I agree that it is partly cleaning up, I think it is more than just cleaning up. There has clearly been significantly higher allocation overall on both revenue and particularly capex in FY21 and specifically on capex in FY22,” she said.
She added that in 2020, the entire burden of spending for growth was done by the central bank. However, that is changing now.
“From the MPCs standpoint it does change the game a little because if you look back in 2020, the entire burden of growth heavy lifting has been done by monetary policy whereas fiscal has been constrained for various reasons. Now that seems to be changing and the confidence that fiscal will do some of the heavy lifting should be there when the deliberations are being made,” she said.
Sajjid Chinoy, Chief India Economist at JPMorgan believes that the RBI and MPC will take comfort from the trajectory of fiscal deficit.
“The RBI and the MPC will take comfort not just from this year’s numbers, but from the trajectory over the next few years; that the level of deficits now are budgeted to be meaningfully higher than perhaps what the RBI had foreseen or what markets had foreseen. This means two things; one is it takes some of the pressure off the RBI and it allows the RBI to perhaps gradually normalise conditions. We don’t want to be in a situation where both barrels are firing simultaneously where you have got fiscal expenditures high and real policy rates are consistently negative. So, this allows the RBI the time and the space to normalise,” he said.
Samiran Chakraborty, Chief Economist at Citi said that he is relatively comfortable on the inflation trajectory and that the RBI should focus on growth now and not on inflation.
“I am relatively comfortable on the inflation trajectory staying in the broad range of 4.5-5.5 percent. I am giving this very broad range because I think within that range, RBIs focus should still be on growth and not so much on inflation. They should not be in a hurry to get inflation just back to 4 percent so early,” he said.
According to Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI, the liquidity draining program should be very gradual.
“The liquidity draining program should be very gradual and I think the focus after yesterday’s Budget when the total – if you look at the centre and the states gross borrowing program which is nearly identical to what it was last year at around Rs 18 lakh crore. So, I think the focus might have shifted a little bit. Earlier we were expecting that the liquidity draining program could be done at a faster pace, but now the central bank need not drain out the liquidity, but it may have to support the liquidity in the market through other operations,” he said.Watch the video for more.