INDIA: Fiscal and Monetary Policy Stimulus Measures in Focus Amid Slowing Growth

Near-term focus for India lies on the budget presentation over the weekend (Feb 1) and the RBI rate decision next week (Feb 7). The budget from Finance Minister Nirmala Sitharaman is expected to deliver measures targeting increased spending on infrastructure, manufacturing, rural development and defense. Meanwhile, the latest set of measures announced by the RBI to inject liquidity into the banking system have been interpreted as a precursor to rate cuts.

• The balance between fiscal and monetary stimulus will be closely watched amid concerns over slowing economic growth. India’s government lowered its growth projection for the fiscal year, with GDP estimated to expand 6.4% in the year through March, down from 8.2% in the past financial year. Those forecasts sit slightly below the government’s projection of 6.5% last month.
• However, the government’s commitment to reducing its fiscal deficit target to 4.5% of GDP could keep spending announcements in the budget relatively contained, placing pressure on monetary authorities to support growth via easier policy. The central bank’s recent $18bln of liquidity injection measures has likely cleared the way for the start of rate cuts with a 25bp easing step next week, the first meeting under the leadership of new Governor Sanjay Malhotra.
• Goldman Sachs described the RBI’s liquidity measures as a “decisive turn in the monetary policy easing cycle” and expect 25bp cuts in each of the February and April meetings, noting that risks are skewed towards more easing should the budget stick to the government’s fiscal consolidation path. Similarly, HSBC “think rate cuts should happen sooner rather than later” and don't expect INR weakness as a result given that many other emerging markets have eased rates and this hasn't added to FX pressure.