RBI may remain neutral through H1FY25; a 50 basis point reduction in the repo rate is conceivable in H2FY25

RBI may remain neutral through H1FY25; a 50 basis point reduction in the repo rate is conceivable in H2FY25

While the Reserve Bank of India has reaffirmed that its policy would remain disinflationary, shifts in fiscal policy and low inflation might cause the RBI to loosen its tight monetary policy stance in fiscal year 2025.

Given that general elections were scheduled for April–May 2024 and that the new central administration was expected to provide the whole budget in June–July 2024, the Union Budget for the financial year 2024–25, which was presented on February 1, 2024, was vote on account.

In its interim budget, the administration placed a high priority on fiscal prudence and opted to follow the fiscal roadmap plan, which calls for bringing the deficit down to less than 4.5% of GDP by FY2026. Given that it is an election year, this was praiseworthy. The largest victory for the debt market came when the budget deficit goal for FY24–25 was announced. It was 5.1% of GDP, much less than what the market had anticipated. Additionally, the government has lowered the budget deficit from 5.9 percent of GDP to 5.8 percent for FY 2024.

The budget balanced consumer confidence, growth (driven by capex), fiscal consolidation, and political messaging before to the election. The government's budgetary situation has been helped by increased tax receipts (including direct and indirect taxes), a greater RBI dividend, and a decrease in subsidy leakages. The Budget states that additional spending consolidation is anticipated in the next year, with an ongoing emphasis on capital investment and improved projected quality of expenditure.

We think it is reasonable to anticipate 10.5 percent nominal GDP growth for FY 2025 in order to determine the fiscal ratio. Should the growth rate persist, this might be increased in the overall budget.

In FY2024, direct tax receipts soar, contributing to the budget's increased expenditure on subsidies and fiscal imbalance.has aided in maintaining its low. Over the last ten years, direct tax receipts have more than quadrupled. In FY2015, tax receipts are predicted to increase by around 12%, meaning that there will be 1.1 tax buoyancy. Simultaneously, an approximate 11% rise in gross tax income (direct and indirect tax revenues) is projected for FY 2025. For FY25, the government has set a goal of Rs 50,000 crore for disinvestment. From the revised projection of Rs 3.75 lakh crore in FY24 to Rs 3.99 lakh crore in FY25, non-tax income has grown. Our analysis suggests that the revenue growth estimate is fair.

With the goal of reducing revenue spending, the government has taken fiscal consolidation into consideration. Fiscal consolidation is predicted to expand by 3.23 percent in FY2025. Consequently, the revised estimate of Rs 44.90 lakh crore for FY2014 has been raised to Rs 47.66 lakh crore for FY2015, representing a rise in overall expenditure. Crucially, by allocating a record-breaking Rs 11.11 lakh crore for capital expenditures (as opposed to the reduced projection of Rs 9.5 lakh crore in FY24), the government has kept its emphasis on long-term growth. This illustrates the government's resolve to reach a GDP of $7 trillion by 2030.

Because of this, private capital spending is probably going to pick up speed in the 2025 fiscal year. Thus, the rise in budgeted capital spending has counterbalanced the stabilization of revenue expenditure. One may consider this budget to be deflationary.

The objective for the budget deficit in FY25 is set at Rs 16.85 lakh crore. The majority of the Rs 4.6 lakh crore in additional financing, according to official estimates, would come from modest savings. This leaves a total of Rs 12.25 lakh crore for market borrowings, of which approximately 11.75 lakh crore will come from dated securities and Rs 50,000 crore from treasury bills. The gross supply for FY25 is anticipated to be Rs 14.13 lakh crore after maturities and switches are taken into account.

The RBI's policy meeting is set on February 8 of next week. While the Reserve Bank of India has reaffirmed that its policy would remain disinflationary, shifts in fiscal policy and low inflation might cause the RBI to loosen its tight monetary policy stance in fiscal year 2025. According to our analysis, the RBI would probably take a neutral position through the first half of FY2025 before reducing the repo rate by 50 basis points to 6% in the second half of the year. We anticipate additional yield declines and INR stability in addition to a gradual relaxation of policies.

The financial markets are benefiting from the budget. Growth will benefit from more capital spending, and the economy will pay less in borrowing costs if gross borrowing is less than anticipated. With general elections looming and the country added to the JP Morgan Emerging Markets Bond Index, along with a possible global yield drop, India is in for an intriguing year. Index inclusion is projected to be a significant driver of additional bond demand in FY20, bringing in around $25 billion. This is encouraging for the Indian fixed income market in FY20 and beyond, especially when combined with the anticipated softening cycle.