Fo­cus on Con­trol of Ex­pen­di­ture, Pub­lic In­vest­ment

The cen­tral bank is ex­pected to cut pol­icy rates by 25 bps next week EX­PERT TAKE

The Economic Times - - Front Page -

cia­ries of the Bud­get pro­pos­als. Sin stocks get near-term re­lief as there were no puni­tive taxes.

On bal­ance, we be­lieve it would not take too much for eco­nomic growth to mean re­vert (move back to the av­er­age) in FY18, off a low base. The global growth en­vi­ron­ment for cal­en­dar year 2017 ap­pears to be mean­ing­fully bet­ter than in 2016. The de­mon­eti­sa­tion im­pact has not been as much as feared ini­tially as seen from high fre­quency data points.

Con­cerns of a liq­uid­ity crunch are also mod­er­at­ing as a sub­stan­tial part of the de­mon­e­tised cur­rency is be­ing re­placed with new notes. The del­uge of liq­uid­ity into the sys­tem has re­sulted in very easy mon­e­tary con­di­tions and aided trans­mis­sion. Lend­ing rates are now down al­most 200 bps since the eas­ing cy­cle com­menced. Against this back­drop, the fis­cal stim­u­lus pro­vided should be seen as a cat­a­lyst rather than hav­ing to do all the heavy lift­ing.

The Bud­get is the be­gin­ning of a n e ve n t - h e av y f i f t y d ay s . Ex­pec­ta­tions are for the RBI to cut pol­icy rates by 25 bps next week. Sub­se­quently, at­ten­tion will shift to pol­i­tics, given the assem­bly elec­tions in five states. The ex­ter­nal en­vi­ron­ment also needs to be watched, par­tic­u­larly given the sig­nals of in­creased pro­tec­tion­ism in the US. Mar­kets could turn volatile in the event of ad­verse out­comes in any of these events.

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