India: Fiscal normalisation to keep RBI on the hook

Expectations of a supportive macro policy environment have underpinned our positive 2021 outlook for India for some time. Despite the impressive growth rebound in Q3 2020, we expected policy normalisation to be staggered to foster the recovery. This continues to be the case. While we now forecast a larger fiscal withdrawal starting in Q2 2021, we expect the delayed onset of monetary policy normalisation to buffer the economy during the fiscal shift

What you will learn from this report:

  • India’s latest Union budget has raised hopes that fiscal policy will finally pick up the growth baton and ease pressure on the RBI to continue to lead the pandemic policy response.
  • Budget proposals will create positive externalities for the private sector, and forecast slower fiscal consolidation in FY2022 than the government projects. A proposed increase in capital expenditure should also lower the contractionary impact of the consolidation on GDP.
  • Alongside the planned government spending boost in Q1 and receding Covid-19 risks, the shift in the monetary policy outlook supports our 2021 growth upgrade to 10.2% from 8.8% earlier.

Topics: Asia, India, Financial risks, Asia Pacific, South East Asia

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