Following months of flagging growth and tepid market performance, finance minister Nirmala Sitharaman announced a raft of measures on Friday that ultimately saw the BSE Sensex and Nifty achieve record highs by the time the markets closed. Samiran Chakraborty, chief economist at Citi, in an interview to CNBC-TV18 said that the corporate tax rate cuts announced by Sitharaman is a step in the right direction.
“Tax rate cut is the right path to take and it will increase competitiveness, productivity, and private investment,”Chakraborty said.
“This is one of the biggest reforms that we have seen in a long time which tries to address the problem from the supply side by trying to get in more private investment into the economy. This process will take a while before private investment kicks in, but this is a much better quality growth than giving a demand stimulus which could have given us short term growth, but would not have changed the outlook from a more medium term perspective,” he added.
Chakraborty said that he is optimistic about FY21 growth numbers. “In FY20 we were at around 6 percent which already had baked in the monetary stimulus as well as some kind of fiscal stimulus. To get to the 6 percent mark, we are already assuming that there will be a sequential quarter-on-quarter (QoQ) improvement in growth numbers. So by the end of the year we are probably going to see a number close to 7 percent in any case. So that gives us confidence that for FY21 we could see a 7 percent kind of growth on a sustained basis.
“If we see more action, then we will probably have to raise our 7 percent number even further for FY21, but for now FY20 we are leaving at 6 percent and FY21 at 7 percent,” Chakraborty added.
Speaking on the monetary stimulus expectations, Chakraborty said that he expects a 40-50 basis point rate cut. “There will be some rate cuts for sure, but the quantum of rate cuts, we have toned it down marginally from about 60-70 basis points to more about 40-50 basis points just because the RBI [Reserve Bank of India] might think that if the fiscal stimulus is already underway, then the need for a monetary stimulus is that much lesser.
“We think the October policy will get about a 25 basis point rate cut and then probably a small one in the latter part of the year. So that will take us to the terminal rate of about 5 percent and that is where the I think the RBI will take a pause and see how things are panning out,” Chakraborty added.
On bond yields, he said: “We think that there is a possibility that rates can move up to about 7 percent or so in this particular news-based move. However, we also feel that there could be some kind of counter balance coming from the RBI either in the form of open market operations (OMO) or in the form of liquidity management framework that they are likely to announce soon. So we could see some respite coming on from there.”