MUMBAI: Despite the BJP’s manifesto objective of bringing down interest rates on coming to power, cost of funds is unlikely to come down in the short term as the government is expected to announce an oversized borrowing programme in its forthcoming Budget. The Reserve Bank of India is also expected to keep rates on hold in its June policy as it waits to see the impact of monsoons on food prices.

The BJP, in its election manifesto, has promised to break the vicious cycle of high inflation and high interest rates. Party spokespersons have also spoken about bringing down interest rates should it come to power. In its previous term at the Centre, the NDA government had adopted a policy of bringing down interest rates. It was under the NDA that the yield on the 10-year government bond had fallen below 6% – the only time in history. The yield on the 10-year bond fell to 8.74% from its previous close of 8.78 after the results but soon rose to 8.83%. Economists feel that interest rates cannot be brought down immediately because of a number of factors.

According to Taimur Baig, chief economist, Deutsche Bank Research, although yield on government bonds may drop in anticipation of foreign inflows, this is likely to peter out as interest rates will be under pressure because of the prospect of higher government borrowing to be announced in the final Budget due in July.

“Historical precedents indicate that the fiscal deficit and issuance programme outlined in the interim Budgets are set lower to show fiscal discipline ahead of elections and are revised higher in the final Budget. Revisions are more significant whenever there is a change of government,” said Leif Eskesen, chief economist for India and ASEAN, HSBC. In the interim Budget, the finance minister pegged the FY15 market borrowings at Rs 5.97 lakh crore. HSBC research expects it to be revised higher to Rs 6.3-6.4 lakh crore.

But economists say that there is a possibility that government borrowing can be kept under check by embarking on reforms. These include reducing government subsidies, raising power prices and privatization of public sector undertakings. They say that markets will not wait for the outcome of the measures and investment into equities would start flowing immediately if reforms are initiated.

“We believe investors will be willing to give a premium for growth hope and also look beyond FY15 earnings estimates. By end of 2014, investors would start looking at FY16 estimates. Based on our top-down expectation of 15% earnings growth in FY16, and 15x PE, we set our Nifty target for end-2014 at 8,000,” said Gautam Chhaochharia, analyst with UBS.