Possibility of fiscal slippage top of mind for RBI: Abheek Barua, HDFC Bank

Talking to ET Now, Abheek Barua, HDFC Bank, says despite their emphasis on neutrality, there is one way that rates will move and that is up, perhaps with a long pause or with a short pause depending on conditions.

Edited excerpts:

The governor very categorically said a very close watch is being kept on inflation and have increased it by 10 bps. , The question that somebody should ask is if you do not really see a big risk to inflation and if you see growth projections at 6.7% for this fiscal, why change inflation at all?

The inflation numbers have been revised up because given the existing demand conditions here, you have had certain things contributing to new inflation pressures, particularly oil prices and also some overheating in vegetable prices which were perhaps not anticipated. From that perspective, may be you can construe this as some kind of assurance to the market that the revision in the inflation number should not be read into too much as a signal of impending tightening but be seen simply as a correction because of the emergence of the two things which were not there earlier.

If you look at analysts forecasts earlier, the inflation numbers were hitting the lower end of the band of 4.2-4.6 per cent. With these pressures emerging, they will start hitting the upper end of the band. That is what the policy recognises and perhaps we should not be reading too much into it. But the other way to look at it is that it is an explicit signal that they are more concerned about inflation pressures. So, despite their emphasis on neutrality, there is one way that rates will move and that is up, perhaps with a long pause or with a short pause depending on conditions but it could be construed as a signal, I really cannot tell from at this stage.

The fact that the governor spoke about it and he did say that the decrease in revenue collection on account of GST rates that have been revised downwards and may result in fiscal slippage. Is it fair to assume here that the central bank is now going to keep an a very, very close watch on the budget and that will perhaps be the next trigger even though what we have perhaps seen today is a long pause on the rate cycle?

I am not too sure. You really have to be optimistic to buy into the 7.1% or 7.8% numbers for the second half to take them as indicative of what is going on in the economy. The risk of fiscal slippage remains and they have been very conscious and cautious about the progress of fiscal consolidation. If there is sign of slippage of revenue shortages which are not being met by other sources and streams of revenue, they will use that as another reason for keeping rates on hold.

So, there are two points that I would like to make here, one is of course the fiscal consolidation slippage is sort of top of mind for the RBI for a very long time and number two going by the second half numbers, as any indication either of possible growth that we should believe in or revenue buoyancy -- is being very optimistic indeed.