Electoral shock dashes hopes of rate cut
inflation has been a thorn in the Reserve Bank of India's (RBI) side for long, but the elections have thrown up a new reason for the central bank to keep rate cuts at bay for the foreseeable future — a potentially new fiscal landscape led by populist spending.
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Exit polls last week had predicted a resounding majority for the BJP-led National Democratic Alliance.
This had led to widespread speculation in bond markets that the Centre, which has recently received a record-high surplus dividend from the RBI, could use the extra funds to sharply reduce fiscal deficit. The results, however, present a different situation.
«While political stability should help ensure continuity in policy agenda, we see risk of populist bias in the third term targeted towards lower income strata and change in economic policy dynamics with tougher reforms getting pushed further out,» said Tanvee Gupta Jain, economist, UBS Securities. «In the upcoming budget (in July), our base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias.»
While markets did not expect a rate cut at the RBI's next policy statement on June 7, the prospect of the Centre taking sharp strides towards fiscal consolidation and bringing down its borrowing would have given the central bank plenty of comfort on aggregate demand conditions in the economy. Tellingly, the
