The Government Budget was fiscally prudent and has not deviated from fiscal consolidation and its target. This budget has been cheered by tax-paying individuals, but the markets have given it a neutral view. The Capex projections have been conservative, and borrowing has followed market-accepted norms. So, the question is: how will the government stimulate the economy? Certainly, tax cuts may play a role, but what if they don't? Imagine if people save rather than spend, which increases liquidity in the system, leading to lower borrowing rates. Oh wait, doesn't that make things interesting? The RBI and the Government's relationship is back on track, with the latter not blaming the former. Why is that? Because this might cushion the RBI from aggressively lowering rates to bring in liquidity and stimulate the economy.
The second scenario is if spending goes berserk, stimulating growth and inflation. But wait, a bit of inflation is always good for the economy, remember the 2-4% target.
The government did not announce any reforms to stimulate the economy, but you might counter with the 0% tax up to 12 lakhs. Let's rework the numbers: 2.5% of the total taxable population falls within this radar - how much of it will stimulate the economy, so the answer is 1Rs tax cut adds 0.2 Rs to 1 Rs to the GDP.
An IIM Bangalore study tells us that Rs 1 spent on Capex adds Rs 2-3 to the GDP. It increases household consumption and expenditure, and also contributes to an increase in auto sales. Isn't that amazing? Look at the multiplier effect. Rs 1 lakh crore in revenue foregone due to tax cuts will not create the same multiplier effect as investments in building roads and infrastructure.
So, the mantle of stimulating the economy is being passed to the RBI!
February 7th is on the cards, and all eyes are on the RBI's monetary policy. Will the RBI cut rates? It's a big question. With currency depreciation, trade problems due to tariffs, supply chains being revamped, and the capital account getting battered -not to mention the $70 billion fall in reserves since the rupee touched $704 billion as the RBI was protecting the rupee from depreciation - things have gotten interesting. Also, RBI have shelled out $200 Billion in last couple of years protecting the Rupee.
Unlike various global currencies that have found their base and price, the rupee has been overvalued due to RBI action. The RBI realized that the rupee needs to find its own way, and from Rs 82 → Rs 84 → Rs 86.70, there you go. With currency falling, tariff issues looming and importers demanding more dollars due, remember we import more than we export there leading to further depreciation.
Will the RBI cut rates? What do you think? Give it a thought. Indonesia recently did. India and the RBI will have to stop playing by the books, as the concept of "history repeating itself or rhyming" is becoming obsolete. The RBI has to take a cautious yet brave step tomorrow. Do you think a rate cut is on the cards or not?
Global Landscape - Europe has cut, the UK has cut, and the US is at status quo.
Remember, the inflation-adjusted rates are still attractive, which will prevent the rupee from becoming unattractive—and the RBI knows this. We feel the rate cuts are not on the cards; if not cuts, then other tools may be used. The markets are pricing in various permutations and combinations. But the RBI might surprise the markets, remember 2019!
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
Authored by: Ankit Baid, Research Analyst at Affluence Advisory
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