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What is the outlook on the overall policy front given the fact that we are working with the status quo on rates. Do you think that that is potentially what will emerge from the RBI stance?
Yes, I think this is one of the policies where RBI needs to be a bit more cautious because there are lots of moving parts. There are moving parts in the global economy where the central bank actions have got somewhat desynchronized. Even global growth is getting a bit desynchronized, not every part of the world is moving at similar pace which is very different from last three-four years when things were absolutely synchronized.
But domestically RBI can take comfort from the fact that the growth momentum is continuing very strongly and inflation is at least not showing a significant sign of increasing, although we must say that by our estimate the inflation trend which will be released in June for the month of May that would inch up a little bit to 5.2% but overall this combination of growth and inflation is telling them to stay on guard, on top of it given that there is now some uncertainty on the fiscal outcome, they might want to see through it, they want to see through the monsoon situation as well before they can embark on the easing process.
Would it be premature to expect that perhaps the MPC is going to soften their stance? I mean, could one anticipate perhaps a withdrawal of accommodation to now neutral?
In my view, this is a policy where the MPC should be focusing more on risk minimisation. There are some risks emerging particularly on fiscal bit of political uncertainty. In these kind of times, it is better to not drop the boat by doing major changes, so in that sense the change of stance could more be in August policy discussion rather than in June.
But having said that we have been arguing for a while now that the conditions for a rate cut and the conditions for a stance change are becoming very difficult to distinguish. It appears that RBI will do the stance change very close to the actual rate cut when they have absolute comfort that the CPI is firmly aligning with the 4% target.
What we also want to understand is that will RBI actually wait till the Fed cuts rate or would it take and would October be the period that we should start seeing rate cuts coming in from the RBI or will they be waiting for the Fed?
In Citi's house view, we think that the Fed rate cut will start early, so we have put our first RBI rate cut in October, to some extent also factoring that in that if Fed moves earlier, then RBI gets the scope to move as well.
I will actually be a bit surprised if the RBI cuts rates before the Fed. Although I must say that in general the extent and depth of the rate cuts will be determined more by the domestic developments and less by what is happening globally or in other words RBI's main objective would be to see that CPI is aligning with the 4%.
But in any case moving ahead of the Fed I do not think any of the Asian central banks would be planning for that at this moment.
I am going to deviate a little bit from the policy here because you as well alluded to just a short while back it is clear that there is leadership continuity now. Would it be a fair assumption that there would be a policy continuity too irrespective of whoever becomes the FM, whether the current one or a new face?
Our view is that the broad thrust of policy which has been a combination of infrastructure, manufacturing, technology, digital, there will not be any big deviation in that.
Also, we have difficult times on this financial and macro stability. I do not think the government would want to lose that at any cost, so that financial, macro stability and this broad thrust of infrastructure, manufacturing, technology, and digital this combination will be there for the new government as well.
The only thing is that what all do they add on to this? Would there be an element of active employment creation modules attached? Would there be something to do with helping out the poor in a more explicit way also being added? Those are things which will be interesting to see. But the first two big structures, I think they are going to remain pretty intact under the new government as well.
Is it right to think that now the government would have perhaps some amount of pressure or compulsion to increase social spending because that is going to sort of because that is going to sort of change the entire dynamic of all the assumptions on a macro level that one has been making so far.
Obviously, any government will analyse the political outcome and try to figure out that what has been the reasons for that outcome and from that will deduce whether there is any policy intervention required or not. But at least for fiscal year 25, the government does have some fiscal space. The RBI dividend has been significantly large. The revenue growth at this moment is happening at a better pace than what the government would have probably budgeted for.
In our view, about 0.4% of GDP of additional fiscal space is definitely available to the government even if they want to stick to that exact 5.1% of GDP target that was announced in the interim budget for fiscal deficit.
So that is not a very small sum of money to start some additional social spending, etc. The only thing I would say is that typically when you plan for these schemes, these are not one-offs just for one year, this has to be planned in a way that can be continued. So, we need to find out revenue sources which will also be more durable to support those kind of schemes.
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