(Bloomberg) -- The Narendra Modi government’s $550 billion India budget aimed at boosting consumption by lowering taxes will not stop the central bank from moving toward a pause in interest-rate hikes by the end of this quarter, according to some economists.
The new tax rates are unlikely to add to inflationary pressures in the economy in the near-term, said economists including Nirmal Bang Institutional Equities Pvt.’s Teresa John. That’s because the new tax regime offers an opt-in which is more likely to be exercised by entrants to the job market, while current taxpayers will probably choose the structure in place.
While the six-member Reserve Bank of India panel voted to raise borrowing costs by 35 basis points in December to 6.25%, the minutes of that meeting showed that views have begun to diverge. One rate-setter opposed the increase and two resisted RBI’s continued focus on withdrawal of accommodation even after 225 basis points of increases since last May.
The inflation-targeting RBI is due to meet Feb. 8 to review policy settings, amid data showing price gains have returned within its 2%-6% target range since November. That’s not the only indicator policymakers will be tracking. The Federal Reserve had just downshifted to a quarter-point rate increase, although Chair Jerome Powell signaled a couple more moves before ending the tightening cycle.
“We believe that the RBI will continue to move toward a pause,” said John. “Even when GST was implemented, it was widely expected that it would be inflationary but on a net-to-net basis, the rate was lower and taxes didn’t lead to inflation,” she said, referring to the goods and services tax.
A Bloomberg survey of economists showed India’s policymakers are expected to wind down its most aggressive tightening cycle since 2011 after a 25-basis-point move this quarter.
“We think its inflation neutral,” said Yuvika Singhal of QuantEco Research, who expects the RBI to move by a quarter-point next week and pause after. “The budget balances both demand boost and supply augmentation,” she said.
Wednesday’s budget, the Modi government’s last full year spending plan before a national vote in 2024, sought to leave more money in the hands of the people, by rejigging tax rates under old and new regimes. This included exempting income up to 700,000 rupees from tax versus the earlier threshold of 500,000 rupees under the new option, which is seen as having a multiplier effect on consumption — the economy’s backbone.
“The RBI will take this budget as positive for domestic growth, both investment and consumption,” said Rahul Bajoria of Barclays Plc. “We think February will be the last hike.”
The government forecasts the economy will expand 6.5% in the year beginning April, slower than the expected 7% growth this year. Economists also see the government’s plan to trim fiscal deficit to 5.9% of gross domestic product next fiscal year from 6.4% of GDP in the year ending March as a positive.
“The budget maintains fiscal prudence and the inflation trend is moderating,” Morgan Stanley economists including Upasana Chachra wrote in a note. “We expect the RBI to deliver a final rate hike in the February policy review and change its stance to neutral.”
--With assistance from Karthikeyan Sundaram.
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