: Not walking alone: A bond and macro update (Opinion) #IndiaNEWS #Commentary By Suyash ChoudharyThe government announced a series of steps aimed at providing some relief against the unprecedented commodity

@IndiaNEWS

Posted in: #IndiaNEWS #Commentary

Not walking alone: A bond and macro update (Opinion) #IndiaNEWS #Commentary
By Suyash ChoudharyThe government announced a series of steps aimed at providing some relief against the unprecedented commodity price shocks being felt post the geopolitical escalations. Chief amongst these was a Rs 8 and Rs 6 cut, respectively in excise duties on petrol and diesel prices per litre. Apart from these, a Rs 200 subsidy on LPG cylinders has been provided under the Ujjwala scheme. Additionally, customs duties are being cut on some inputs for plastic and steel. Finally, export duties are being hiked on items like pellets, iron ore, and some steel products. All told, these constitute a substantial set of measures and come at just the time when monetary policy was turning quite wary of the developing supply side inflation dynamics. Importantly, this also constitutes a signal that government is equally committed to the battle against inflation (media reports suggest more measures may be taken later if required).
Some Observations
A government unwilling to expand fiscal deficit through resisting subsidizing parts of the consumer basket should ordinarily be seen as complementing monetary policy action in curbing inflation. This is because monetary policy acts to curb aggregate demand by weighing down on parts of its components (Private consumption, Investments, Government consumption, Net exports). As can be seen, an expansion in government spending works at cross-currents to this. Thus by extension, a government unwilling to expand deficit is working in tandem with monetary policy. However, a different approach may have been required in case of fuel items and some other essential inputs owing to the risk of cascade of these prices through the entire manufacturing value chain. It is for this reason, presumably, that RBI/MPC members seem to have been encouraging the government to act. If media reports are to be believed, it is disappointment on this front that may have led monetary policy to come on the front foot on rate adjustments. A theoretical question may be asked to clarify the point: Would the inter-meeting hike have occurred if the government had announced these steps ahead of that meeting?
We dont really know the answer to the above question. Notwithstanding that, with a government now seemingly also focussed on bearing the burden (and after having made a hefty down-payment on the same with these latest measures) the pressure on monetary policy should lessen, ceteris paribus. Now this statement needs to be interpreted carefully. After the April policy and before the May inter-meeting hike, the market as per the swap curves was pricing in 275 bps hikes over two years from the overnight rate of 3. 75 per cent then. Around 75–100 bps of these were expected in year two.

Intraday stocks under 50 NSE India Twitter of India

Vote Up Vote Down

Login to post a comment!