homeeconomy NewsBudget impact on RBI policy: Economists weigh in on fiscal deficit and monetary outlook
Budget impact on RBI policy: Economists weigh in on fiscal deficit and monetary outlook
In a discussion with CNBC-TV18, prominent economists shared insights on the impact of the government's low fiscal deficit target on the upcoming RBI monetary policy decision. They highlighted the potential for policy normalisation and the need for stimulating private investments.
The government's lower than anticipated fiscal deficit target, at 5.1%, for the next financial year, has shifted the spotlight to the upcoming monetary policy decision by the Reserve Bank of India (RBI), scheduled on February 8. A low fiscal deficit eases concerns about excessive government spending, allowing the central bank to contemplate normalising its policies, including interest rates.
In a discussion with CNBC-TV18, prominent economists Pronab Sen, former chief statistician, Samiran Chakraborty, Chief India Economist at Citibank, Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI, and Sajjid Chinoy, Chief India Economist at JPMorgan shared their view on Budget 2024 delivered by Finance Minister Nirmala Sitharaman on February 1, and expectations from the RBI monetary policy due to February 8.
Pronab Sen drew attention to the importance of stimulating private investments, which has been sluggish, suggesting that even a modest boost in this direction could be beneficial.
Regarding the fiscal deficit, Samiran Chakraborty, Chief India Economist at Citibank, indicated “In our sense, if the government has to meet their deficit target for FY24, then over the next couple of months the amount of spending that the government will have to do that will more or less take care of this frictional banking system liquidity deficit issue by end of March.”
Chakraborty also stressed that the RBI needs to communicate with the markets that the reason for the weighted average call rate to stay closer to the marginal standing facility (MSF) rate is purely a liquidity issue and nothing to do with the stance of monetary policy. MSF is the short-term lending rate at which RBI provides funds to scheduled commercial banks.
Soumya Kanti Ghosh, Group Chief Economic Advisor at SBI, discussed the potential shifts in government spending patterns towards conditional disbursements. Ghosh suggested a mechanism where funds are released only after previous amounts have been spent, thereby keeping government cash balances with the RBI rather than banks.
Ghosh proposed incorporating counter-cyclical elements into monetary policy, such as adjusting the Liquidity Coverage Ratio (LCR) and Cash Reserve Ratio (CRR) based on prevailing liquidity conditions, to provide real-time stabilisation during periods of economic stress or surplus.
LCR is a regulatory requirement that mandates banks to hold a sufficient amount of high-quality liquid assets to cover short-term liquidity needs during times of financial stress. CRR is the portion of a bank's total deposits that must be kept in reserve with the central bank, reducing the amount of funds available for lending and influencing the money supply in the economy.
Sajjid Chinoy, Chief India Economist at JPMorgan, discussed the US Federal Reserve's decision to keep rates unchanged. He noted that the Fed is in a favorable position with sustained US growth and moderating core inflation. This situation allows central banks in developed markets to adopt a patient approach towards addressing inflation concerns, indicating a likelihood of easing measures later in the year.
(Edited by : Shweta Mungre)
First Published: Feb 2, 2024 2:02 PM IST
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