Focus on Control of Expenditure, Public Investment
The central bank is expected to cut policy rates by 25 bps next week EXPERT TAKE
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.