RBI likely to adopt neutral stance by H1FY25, 50 bps repo rate cut possible in H2FY25
Though RBI has reiterated that the policy would continue to remain disinflationary, the RBI’s hawkish monetary policy stance may soften in FY25 due to a change in fiscal policy and lower inflation.
The Union Budget presented on February 1, 2024 for FY 2024-25 was a vote on account due to General Election likely to happen in April-May 2024 with the full Budget to be presented by new Central Government in June-July 2024.
The government prioritized fiscal responsibility in its interim budget and decided to stick to the fiscal road map plan to reduce fiscal deficit to below 4.5 percent by FY26. It was commendable given this is an election year. The biggest win for the debt market – Fiscal deficit target of 5.1 percent of GDP for FY24-25 which was much lower than the expectation on the street. The government has also reduced the fiscal deficit for FY24 from 5.9 percent to 5.8 percent of GDP.
The Budget delicately maintained balanced among pre-election political messaging, growth (led by capex), consumer confidence and fiscal consolidation. Buoyant tax revenues (both direct and indirect taxes), higher RBI dividend and reducing subsidy leakage has supported government in its fiscal position. As per budget, in coming year, the further consolidation is expected to come from spending side and improvement in the quality of expenditure with continued focus on capex.
Nominal GDP growth for FY25 is assumed to be 10.5 percent for estimating the FY25 fiscal ratios, which according to us is fair. If growth momentum continues, it can be revised upwards in the full budget.
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[Deepak Agrawal]
Deepak Agrawal
Chief Investment Officer (Debt Fund)|Kotak Mahindra Asset Management Company
View: RBI will likely change stance to neutral starting early FY2025 only
RBI likely to continue with hawkish pause amid surging vegetable prices
MPC may hike repo rate by 25 bps, change monetary policy stance to neutralDirect tax revenues have been buoyant in FY24 which has helped in funding higher outlay on subsidies for FY24 and keeping fiscal deficit lower than budgeted. The direct tax collections have more than trebled over the last 10 years. The tax collection is estimated to grow at ~12 percent in FY25, indicating a tax buoyancy of 1.1. At the same time, gross tax revenues (both direct and indirect tax collection) are estimated to increase by ~11 percent in FY25. The government has set a disinvestment target of Rs 50,000 crore for FY25. The non-tax revenue has been increased from revised estimate of Rs 3.75 lakh crore in FY24 to Rs 3.99 lakh crore in FY25. The revenue growth assumption in our assessment appears to be fair.
The government has aimed for lower revenue expenditure which is expected to grow by 3.23 percent in FY25 keeping fiscal consolidation in mind. Hence the overall expenditure has been increased from revised estimate of Rs 44.90 lakh crore in FY24 to Rs 47.66 lakh crore in FY25. Importantly, the government has maintained its focus on long-term growth by allocating a record high of Rs 11.11 lakh crore towards capital expenditure (versus revised estimate of Rs 9.5 lakh crore in FY24). It indicates government commitment to achieve $7 trillion GDP by 2030.
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Also read: India can sustain current levels of growth with or without private capex: Finance Secretary
Given this, private capex is also likely to pick up in FY25. Hence the normalization of revenue expenditure has been offset by increase in budgeted capex. This can be seen as disinflationary budget.
The fiscal deficit target for FY25 is pegged at Rs 16.85 lakh crore. The government has estimated Rs 4.6 lakh crore of funding from other sources, with bulk coming in from Small Savings. This leaves Rs 12.25 lakh crore number for market borrowings, out of which Rs 50,000 crore is likely to be borrowed from treasury bills and ~Rs 11.75 lakh crore from dated securities. Adjusting for maturities and switches, the gross supply for FY25 is expected to be Rs 14.13 lakh crore.
The RBI’s policy meeting is due next week on February 8. Though RBI has reiterated that the policy would continue to remain disinflationary, the RBI’s hawkish monetary policy stance may soften in FY25 due to a change in fiscal policy and lower inflation. We believe the RBI is likely to adopt a neutral stance by H1FY25 and possibility of 50 basis point repo rate cut, bringing the repo rate down to 6 percent in later part of FY25. Alongside gradual policy easing, we foresee a further decline in yields and INR stability.
The budget is positive for the financial markets. Higher capex brings in good news for growth and lower than expected gross borrowing numbers would help in bringing down the cost of borrowing for the economy. India faces an interesting year ahead with general elections and J P Morgan Emerging Market Bond index inclusion amidst potential easing of yields globally. Index inclusion will be a significant source of incremental bond demand, attracting ~$25 billion in FY25. This, along with the expected easing cycle, bode well for the Indian fixed income market in FY25 and beyond.
