How will RBI read the upcoming Budget?

The upcoming Union Budget 2018 is likely to impact RBI’s fifth monetary policy for FY18 on February 7, 2018.
 
As this Budget would be very crucial for the Modi government, which is gearing up for the next year's general election, analysts at Bank of Baroda say, “While the fiscal deficit in FY18 has expanded beyond the targeted 3.2%, the slip has been led by lower indirect tax revenues, despite disinvestments and direct taxes overshooting their targets as of now.”
 
The government’s net direct tax collections rose by 18.7% year-on-year till January 15, to Rs 6.89 lakh crore for the financial year 2017-18 (FY18).
 
This would comprise 70.3% of the total Budget estimates of direct taxes for FY 18 - which stands at Rs 9.8 lakh crore.
 
The Goods and Services Tax (GST), which replaced indirect taxes, came in at five-month low to Rs 80,808 crore in November 2017 -- down from Rs 83,346 crore in October 2017.
 
Analysts at BoB further said the extra borrowing is being spent on public investment and should be seen in that light.
 
India's fiscal deficit stands at Rs 6,12,105 crore in just eight months of FY18, overshooting the budgeted estimate (BE) target by 112% for the current financial year.
 
The government has estimated Rs 5,46,532 crore of fiscal deficit for FY18.
 
Moreover, the Consumer price index (CPI) inflation, which is at 17-month high currently, is expected to trend even higher towards 5.5-6% in 1QFY19.
 
Considering the above factor, BoB analysts believe the RBI will remain in pause mode as it would want to support growth.
 
Further, they said that rising international fuel prices remain a key risk to our forecasts as higher crude prices may force the RBI to raise rates earlier than expected.
 
Bank of Baroda analysts are not alone in forecasting rise in repo rate, global investment bankers like Morgan Stanley and Goldman Sachs had earlier expressed that RBI should start raising key policy rates.