Fractured poll verdict unlikely to impact RBI’s monetary policy, say experts

Reserve Bank of India

The election results, which did not throw up a clear mandate for any party, are unlikely to have any bearing on the stance of the  Monetary Policy Committee (MPC), as the MPC's decisions are based on domestic and global economic conditions, experts said.

“As of now, the new political equation doesn't change anything much for the RBI (Reserve Bank of India) in the immediate run, as the political dust is yet to fully settle. The RBI is unlikely to change its view on broad macro contours on account of this,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.

Further, Madhavankutty G, Group Chief Economist, Manappuram Finance, said that as per the memorandum of understanding (MoU) between the RBI and the government, the central bank has to bring CPI inflation down to 4 percent, which means they are not bound by electoral outcomes.

The six-member MPC of the RBI will release its policy decision on June 7. This will be the second bi-monthly monetary policy in the current financial year.

On May 27, a Moneycontrol poll of 20 economists and bankers showed that the MPC is likely to maintain the status quo in the upcoming June monetary policy meeting, while remaining cautious on inflation.

A majority of experts said that the central bank will maintain its ‘withdrawal of accommodation’ stance. However, two economists said it will be changed to `neutral.'

Also read: RBI Policy: Macros supportive of status quo continuance

Election numbers

The Lok Sabha election results have not thrown up a clear mandate for any single party, and anyone who wants to form the government has to take the support of various allies.

According to the Election Commission (EC) website, the BJP has won 240 seats in the elections, followed by the Congress (99 seats), and Samajwadi Party (37).

The BJP-led NDA bagged 293 seats and the opposition bloc, INDIA, got 233. The BJP on its own has failed to reach the majority mark of 272.

Two allies of the NDA — Chandrababu Naidu's TDP and Nitish Kumar's JD (U) — with 28 MPs between them, are expected to play a decisive role in helping the NDA come to power. Narendra Modi is all set to take charge as Prime Minister for a third consecutive term.

Any impact on the capex plans?

Experts have mixed views regarding the government's capital expenditure plans. While some say the government will continue with the capex that was announced in the interim budget, others feel the government will channelise more funds towards revenue expenditure.

“Yes, one can expect some changes in the spending pattern of the government after the  poll verdict. More funds may be channelised towards revenue expenditure,” said V Ramachandra Reddy, DGM and Head, Treasury, Karur Vysya Bank.

Gopal Tripathi, Head Of Treasury,  Jana Small Finance Bank, said the government will stick to its capital expenditure plans.

The central government’s capital expenditure in 2024-25, according to the interim budget, will be Rs 11,11,111 crore, a number which is more like an auspicious figure than a hard-headed budgetary allocation.

The share of capex in the total expenditure of the central government has increased from 12.5 percent in 2019-20 to 23.3 percent in the 2024-25 interim budget.

However, Madhavankutty  said that the capex target should remain intact as the bonanza from surplus transfers and dividends will help take care of any welfare packages that may be necessitated due to coalition politics.

“Also, the monsoons are expected to be better this year and there won't be much pressure on the MSP (minimum support price) and subsidy fronts. The capex should remain where it is,” he explained.

Also read: RBI to keep status quo on key rates this week

Fiscal consolidation
Experts said that the government's fiscal consolidation will not be derailed, thanks to robust revenue collection and higher-than-expected dividend from the RBI.

Arora said the net fiscal impulse has been restrictive for growth over the last few years, and there is no merit in the government cutting its FY25 fiscal target by an additional 0.4 percent of GDP using the RBI bonanza.

“The June 4 result increases the probability of it (bonanza) being spent instead, implying GFD/GDP could stay at ~5.1 percent, in line with the interim budget. However, this will still be a 0.5 percent consolidation from FY24 (5.6 percent) — implying no threat to the fiscal consolidation path,” Arora added.

India's fiscal deficit for the financial year ended March 31, 2024, stood at 5.6 percent, which was lower than its full-year target of 5.8 percent (of GDP) due to a small cut in expenditure.

The fiscal deficit came in at Rs 16.54 lakh crore, or 95.3 percent of the estimate, even as the government continued its record infrastructure spending to boost the economy.

The Indian economy grew 8.2 percent in FY24, GDP data released on May 31  showed. India's fiscal year starts from April 1 and runs through March 31.