Monday, February 11, 2019

RBI’s February Rate Cut—Surprising or not so.....

In an interesting move, unexpected by many, in the February 2019 policy review the RBI decided to change the stance of monetary policy from calibrated tightening to neutral and to reduce the policy repo rate by 25 basis points to 6.25 percent with a 4:2 majority vote. Consequently, the reverse repo rate under the LAF stands adjusted to 6.0%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5%. Repo is the rate at which RBI lends to commercial banks, whereas reverse repo is the short-term borrowing rate at which the central bank borrows from other banks. The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate below which a bank is not permitted to lend, barring a few exceptional cases permitted by RBI.
This is the first rate cut announced by the MPC since August 2017 and marks a reversal in the rate cycle. Over the course of 2018, the MPC had raised rates twice by a total of 50 basis points to 6.5 percent.

In October, RBI had changed the policy stance to ‘calibrated tightening’ from neutral fearing that elevated core inflation poses upside risks to headline inflation. The shift in stance of monetary policy from calibrated tightening to neutral provides flexibility and the room to address the challenges to sustain growth of the Indian economy, as long as the inflation outlook remains benign, according to the latest policy announcement. The decisions of the MPC in this regard will be data driven and in consonance with the primary objective of monetary policy to maintain price stability.

The rate cut was not anticipated by a majority because it was against the RBI policy if inflation management and came at a time when there was no major downturn in growth, at least according to official data. Though headline inflation has softened considerably, the rate cut was a surprise given that the softening was mostly on account of the volatile food and fuel items, which showed a deflationary trend and expectations mostly in line with global cues as also seasonal factors. Any abatement in global trade tensions and already dovish US policy could well change inflationary expectations. Further, as per government statements the Indian economy is recording stellar performance which dilutes the need for a rate cut, particularly at a time when an expansionary budget had just been unveiled. The change of stance which implies from hawkish to neutral was expected, however, the dovish rate action caught analysts unawares, as it puts the central bank’s credibility at stake with doubts already hovering on the fiscal roadmap of the government.

The move, however, is not so surprising if one goes by a combination of factors mentioned by the RBI in its assessment and outlook, such as the slowdown in both external and domestic demand, weaker flows from institutional investors, borrowing costs remaining elevated, as well as a jobs report and higher frequency indicators showing signs of an economic slowdown. The statement on developmental and regulatory policies also reflects growth orientation. The highlight is the enhancement of the limit of collateral-free agriculture loan to Rs.1.60 lakh, to bring more farmers within the formal credit system. Neither is it surprising when one considers that in an election year, with the government unable to announce any measures for Industry in its February Budget presentation, the long standing demand for a rate cut should be met, given the change at the helm of RBI.

With the inflationary Interim budget and monetary policy being announced in tandem in the election year it will be interesting to see the stance and rate decisions in the subsequent monetary policies as inflation dynamics play out, particularly as core inflation, which is now a global benchmark has remained sticky, still hovering around near.6 percent.

Tuesday, February 5, 2019

Highlights of the Interim Budget 2019

This year’s Union Budget in February as per convention is an interim one awaiting results of elections to be held in May. A national Interim Budget refers to the budget of a government that is going through a transition period. The Interim Budget spans the transition time between the two governments in an election year so that the government can continue to function.  An Interim Budget usually is an account of income and expenditure and doesn't list out new schemes or doesn't unveil any policy measures. However, the ruling party at the Centre took this opportunity to reach out to a large electorate ahead of the Lok Sabha polls and presented a few new measures in form of tax rebates and benefits for the economically weaker sections.  
Following are the key highlights from the announcements made in the Interim Budget 2019-20:
- FY20 fiscal deficit target set at 3.4 percent
- Expenditure target for FY20 set at Rs 27.84 lakh crore
- Capital expenditure for FY20 set at Rs 3.36 lakh crore
- FY19 fiscal deficit pegged at 3.4 percent of GDP; current account deficit at 2.5 percent of GDP
- FY20 gilt repayment pegged at Rs 2.36 lakh crore
-Railway capital expenditure raised to Rs 64,586 crore in FY20 from Rs 53,060 crore in FY19
-Defence budget for FY20 raised to Rs 3 lakh crore

Taxation - Tax benefit of Rs 18,500 crore given to three crore middle-class tax payers
- Full tax rebate for income up to Rs 5 lakh per annum
-Income tax rebate for income up to Rs 6.5 lakh (Rs 5 lakh + Rs 1.5 lakh under 80C of the Income Tax Act)
- Standard deduction for salaried persons raised to Rs 50,000 from Rs 40,000
-Tax-free Gratuity limit increased from Rs 10 lakh to Rs 30 lakh
- TDS limit on bank and post-office savings hiked from Rs 10,000 to Rs 40,000
-TDS threshold on rental income raised from Rs 1.8 lakh to Rs 2.4 l lakh
- No tax on notional rent on second self-occupied house
- Benefit of rollover of capital tax gains under Section 54 to be increased from investment in one residential house to two, for capital gains up to 2 crore rupees
-Vision to create a tech enabled taxpayer friendly tax department
-Benefits under Sec 80(i)BA being extended for one more year for all housing projects approved till end of 2019-2020
-Businesses with less than Rs. 5 crore annual turnover, comprising over 90% of GST payers, will be allowed to file quarterly returns

Agricultural sector -Farmers with less than two hectares to be offered Rs 6,000 per year as direct transfer. Around 12 crore farmers to benefit from the scheme. This scheme will cost the government around Rs 75,000 crore (around 0.36% of the GDP (2019-20 Budget estimate).
-To provide Rs 750 crore in FY19 to support animal husbandry and fishing
-Farmers struck by natural calamities will now receive 2-5 percent interest subvention under insurance scheme
- Two percent interest subsidy to be given to farmers involved in animal husbandry activities via kisaan credit card scheme. An additional three percent subsidy will be paid on timely payment of loans
-Decision taken to increase MSP (minimum support price) by 1.5 times the production cost for all 22 crops

Micro, Medium and Small Enterprises (MSMEs) -2% interest rebate for MSMEs registered under GST for loans up to INR 1 crore
- Requirement of sourcing by government enterprises from SMEs increased up to 25%, of which, at least 3% to be sourced from women-led SMEs
-Government E-procurement Marketplace (GeM) platform extended to Central Public Sector Enterprises

Social security -Mega scheme has been announced for workers in the unorganised sector with a monthly income upto Rs 15,000. The scheme will provide them with an assured monthly pension of Rs 3,000. The scheme is contributory and the government will make a matching contribution
-Rs 60,000 crore allocated for MNREGA for FY20
-Employees' State Insurance eligibility cover limit has been raised to Rs 21,000 per month from Rs 15,000 per month
- Workers who suffer grievous injuries will now receive Rs 6 lakh from Rs 2.5 lakh through Employee Provident Fund Organisation (EPFO)

Income Tax rebates are provided for in place of increasing the non-Tax bracket as the government has made an explicit target to increase the number of tax filers in the country. In the Budget speech, it was pointed out that the number of returns filed has increased from 3.79 crore to 6.85 crore, a growth of 80% growth since 2014.
The Interim Budget announcements when implemented are likely to stimulate demand and boost economic growth, with a slew of benrfits for the middle class, farmers and workers in the unorganised sector, leading to more disposable income in their hands. The overall announcements are positive for consumption and investment, while being slightly negative for inflation, fiscal consolidation and bond markets. Analysts are also worried about how the revenue side estimates will actually pan out. The full budget, which is likely in July 2019, would have more details on spending and revenue mobilization.