Macroeconomic Weekly

It was a major week for economic news releases led by the Union Budget 2021. The thrust of the budget has been toward higher infrastructure led capital spending in FY21-22. Even as the Finance Minister, Nirmala Sitharaman acknowledged that the fiscal deficit would be at 9.5 percent for FY20-21, she noted that better revenues from both tax and non-tax sources would bring this down to 6.8 percent in FY21-22. While the bond market, reacted nervously to the higher gross borrowing target of INR 12 lakh crore for FY 22 by sending benchmark 10 year bond yields higher by 15 to 20 basis points to around a 6.1 percent yield, stock markets were jubilant about higher fiscal spending driving economic growth in FY 22 and with the BSE Sensex ending the budget day up 5 percent.

In other news, India’s manufacturing sector continued to gain momentum in January with IHS Markit’s Manufacturing PMI increasing from 56.4 in December to 57.7 in January. On the other hand, India’s Services sector PMI stood at 52.8 in January compared to 52.3 in December.

Finally, at the RBI Monetary Policy Committee, the central bank chose to leave key policy rates unchanged (Repo rate ; 4 percent, Reverse repo; 3.35 percent) while signaling a continued accommodative stance for monetary policy. The RBI announced that there would a restoration of the CRR in 2 stages in March and May to a level of 4 percent. They also announced that FY 21-22 GDP growth would be at 10.5 percent even while lowering their inflation estimates for the current quarter (Q4FY21) to 5.2 percent.