Pre-election loosening to provide short-lived support

Measures to loosen both fiscal and monetary policy announced this month could provide a small boost to demand in the near-term. The finance ministry made a clear bid in the interim budget to shore up support ahead of the general election with plans to lift rural incomes and cut income tax. But it also attempted to demonstrate its commitment to fiscal prudence by projecting an unchanged deficit in the coming fiscal year. We suspect that it will have to cut back its spending plans later in 2019 in order to hit that target, which will weigh on growth. Meanwhile, interest rates were cut in the RBI’s policy meeting this month – the first under the stewardship of Shaktikanta Das. But with core inflation still elevated and a growing perception that the central bank has allowed its focus on controlling inflation to slip, higher inflation and higher interest rates are likely over the long term.