RBI may hike rates in view of challenging fiscal deficit target, say analysts

Meeting the fiscal deficit target of 3.5 per cent for FY2020-21 is a challenge, and the possible inflationary impact may also result in the RBI hiking rates in the year, analysts said on Monday (February 3).

They pointed out that finance minister Nirmala Sitharaman relies a lot on divestments, where the government under-performed in FY2019-20, to achieve the 3.8 per cent fiscal deficit target. With the objective of pushing growth, the government has resorted to using a clause under which it can stretch its commitments under the Fiscal Responsibility and Budget Management Act by 0.5 per cent, making it the third consecutive year that it has missed the target.

Welcoming the governments stand, analysts at foreign brokerage Bank of America flagged risks to the target. “We see a 0.30 per cent of GDP upside risk to the fiscal deficit target given the extremely high divestment assumption of ₹2.10 lakh crore in FY21, almost triple of FY20s ₹65,000 crore,” it said.

Analysts at Goldman Sachs said that the achievement of the governments plan hinges on privatisation initiatives, and added that if the estimates on revenue collections do not come true, it will have to resort to expenditure cuts again. It can be noted that generally, a rise in fiscal deficits is accompanied by a spike in inflation, which is already beyond the RBIs comfort level.

Goldman Sachs said the central bank will shift the stance of the monetary policy to “neutral” from “accommodative” at this weeks review, and there is a possibility of rates hikes as well in 2020. However, economists at Singapore-based DBS seemed to differ.

“We look for the central bank to remain on an extended pause on rates (even as supply-induced shocks dissipate) but maintain an accommodative bias to ensure cost of capital remains stable and favourable,” they said.

Analysts at BofA said against the backdrop of a “limited fiscal slippage”, they expect a second dovish pause from the RBI MPC on Thursday as the headline inflation is likely to fall to 6.7 per cent in January.