Mumbai: The 2020-21 Budget does not provide any counter-cyclical stimulus to boost consumption, and the Reserve Bank of India (RBI) will have to do the heavy lifting to boost growth by cutting rates, the country’s largest private sector lender HDFC Bank said Wednesday.
The budget announcements are also not inflationary in nature, and the RBI can cut rates as early as in the June review, HDFC said. It added that the rate-setting monetary policy committee will opt for a status quo Thursday.
It can be noted that GDP growth is set to slip to a decadal low of five per cent for FY20, leading to widespread calls for measures from policymakers to push up the number. As risks to inflation materialised, the RBI had surprised all with a pause in rate hikes at the last review.
“Going forward, we think that the scales could tip in the favour of growth as soon as inflation prints become more palatable,” the report by HDFC Bank’s economists said.
It said the headline inflation print will continue to be above seven per cent, much higher than the RBI’s upper band of six per cent for January as well and may cool down later.
The report argued that it is not the high prices of onions alone that is impacting inflation, but the price rise is more broad-based and influenced by increasing global food prices.
Inflation will go down slowly during FY21, and the headline number will come below four per cent level – which is the RBI’s target – only by the second half of the next fiscal year, the report said.
Inflation may go below three per cent as well by December this year on the high base on a healthy production of the winter and summer crops, the report added.
“The RBI might look through the volatility in inflation and lay emphasis on the wide output gap, delivering a cut perhaps as soon as June 2020,” it said.
PTI