Inter-meeting cut cannot be ruled out: Standard Chartered

The Reserve Bank of India (RBI) is likely to reduce the repo rate at its April 5 policy meeting, if not sooner, Standard Chartered said in a report while maintaining that an inter-meeting cut cannot be ruled out.

The fiscal deficit target of 3.5% for 2016-17 is in line with the original fiscal consolidation plan and comes despite a challenging economic environment.

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The global financial services major said the adherence to the original target for 2016-17 would enhance both policy credibility and macroeconomic stability for India, a big advantage in today's volatile global environment.

"With the government adhering to its promise, we expect RBI to reduce the repo rate at its April 5 policy meeting, if not sooner. An inter-meeting cut cannot be ruled out," Standard Chartered said in a research note.

Meanwhile, RBI Governor Raghuram Rajan on February 2 left the key interest rate unchanged, citing inflation risks and growth concerns, while pegging further easing of monetary policy to the government's Budget proposals.

The global brokerage firm said the government's adherence to the 3.5% of GDP fiscal deficit target irrespective of any adverse developments is much in line with the trend since 2013-14.

However, the aspiration to improve quality of fiscal consolidation is unlikely to materialise, it added.

According to Standard Chartered, the government will have to reduce its capital expenditure (excluding for roads) in 2016-17 to meet this target.

This is because the government has overestimated one-off receipts by 0.35-0.40% of GDP, underestimated recurrent expenditure related to implementation of the Seventh Pay Commission and food subsidies and provided a lower-than -expected allocation for bank recapitalisation, which could increase over 2016-17, it said.