New Delhi: The annual budget could push up inflation and prompt the central bank to raise interest rates sooner, analysts said on Thursday, raising the probability of a scenario that could hurt the nascent economic recovery.
Mr Jaitley raised the government spending for rural areas and support to farmers, while slowing the pace of fiscal consolidation.
Traders and analysts said those moves could add to inflationary pressures at a time when retail inflation was at a 17-month high.
That would make the RBI more cautious when it announces the monetary policy review on Wednesday next week, they said.
“The probability of rate hikes in the next fiscal year has gone up materially,” said A. Prasanna, economist at ICICI Securities primary dealership in Mumbai.
A cautious stance at the RBI would increase the probability of interest rate increases in the coming fiscal year. That in turn could raise tensions between the government and the RBI, which has resisted pressures for deep rate cuts to boost growth as it worried about increasing inflation.
Analysts said while the RBI is expected to keep interest rates on hold next week, the budget could toughen the central bank’s tone. They said the government’s decision to increase the minimum support price guarantee to farmers, in particular, is likely to have a direct inflationary impact.
In the budget, the Centre promised farmers to buy their crops at 1.5 times the cost of production, a shift in approach after keeping the average minimum support price increase in low single digits over the past three years.
