Interim Budget 2014: Interest rates may fall in near future

MUMBAI: The Interim Budget has set the stage for lower interest rates in coming months, with a lower fiscal deficit target and smallerthan-expected government borrowing programme for FY15. Bond yields fell nearly 10 basis points after the announcement but closed flat.

"Interest rate going up is behind us and I don't see any logic for interest rates to go up in future. The good news around the corner is that food prices, which were the cause of high inflation numbers, is coming down. If food inflation eases, RBI has a better rationale to hold or bring down interest rates," said Deepak Parekh, chairman, HDFC. He added that downward revisions would be in small measures and there was no scope for large reductions.

Among bankers there has been some uncertainty over which way rates would move given that RBI has indicated that it is keen to make inflationtargeting its major objective and that it is likely to target consumer prices in future. In his speech, the finance minister, however, goaded RBI not to focus exclusively on inflation and to strike a balance between growth and controlling prices.

What has cheered the bond markets is the modest government borrowing programme announced by the finance minister. Sonal Varma, an economist with Nomura, said, "In FY15, the government has set a fiscal deficit target of 4.1% of GDP, which is marginally better than the expected 4.2%. Net market borrowing of Rs 4.57 lakh crore is expected to finance 87% of the fiscal deficit, while gross market borrowings are likely at Rs 5.97 lakh crore in FY15, better than market expectations which were in the range of Rs 6.1-6.4 lakh crore." The positive sentiment in respect of interest rates also stems from expectation that the exchange rate will be steady. "With a fiscal deficit target of 4.1% for FY15 and 4.6% for FY14, economy is well poised to receive confidence of foreign and domestic investors, thus providing much needed support to the Indian rupee," said Nirakar Pradhan, CIO, Future Generali Life Insurance. But most economists also expressed scepticism over the fiscal deficit numbers.

"The Interim Budget rightly targets further fiscal consolidation. However, it was clearly an election budget. The preelection sweeteners, especially the excise duty cuts, will make it difficult to achieve the deficit target. The subsidy target could also prove a challenge. However, the full Budget to be presented after the elections will be the real test of the existing or the new government's willingness and ability to deliver fiscal consolidation," said Leif Lybecker Eskesen, chief economist for India and Asean, HSBC.