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Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

To make amends for its inexplicably harsh monetary policy, the Reserve Bank of India pruned its benchmark interest rate by a quarter-point in early August. Two months later, the RBI has chosen to stay pat. If the previous move was a delayed placebo, the latest inaction prepares the ground for a risky experimental treatment. 

That's because New Delhi is getting desperate to revive slowing growth, which, at an estimated 6.8 percent for the fiscal year, may be running 1.5 percentage points lower than the economy's potential, according to Bloomberg Intelligence economist Abhishek Gupta's estimates.

Precariously Perched
Global investors have plowed $20 billion into Indian fixed-income markets so far in 2017, the most in three years; any policy misstep could raise the risk of a reversal
Source: Central Depository Services

Knowing that a hawkish RBI wouldn't overlook the impact of rising fuel prices on inflation, the government decided on Tuesday night to curb the excise duties it charges on gasoline and diesel. On the surface, that doesn't amount to much: $4 billion in forgone tax revenue over a full 12-month period. In fact, during the remaining six months of the current fiscal year, the largess won't increase Finance Minister Arun Jaitley's budget deficit by more than 0.05 percent of GDP. But the sobering impact on headline inflation, which jumped from 2.4 percent in July to 3.4 percent in August, would be immediate and leave the RBI with no excuse to delay its next rate cut. 

If this looks like a bold -- but eventually futile -- calculation to wake the RBI from its slumber, what makes it risky is the wariness in Indian markets.

Spot the Froth
Indian stocks beat emerging-market peers despite weak earnings
Source: MSCI Inc., Bloomberg

Take equities. Analysts' earnings estimates for the benchmark Nifty 50 index have grown by less than 5 percent this year, compared with a 20 percent jump for the MSCI Index for Asia-Pacific outside of Japan. Yet, the Nifty has rallied 27 percent this year in dollar terms, beating the regional index.

The situation in bond markets, where foreigners plowed in $20 billion so far this year, is even more precarious. Folks at ICICI Securities, a primary dealer in Indian sovereign debt, reckon that the planned budget deficit of 3.2 percent of GDP will miss the goal by half a percentage point. The slippage is partly because the central bank's dividend to the government is lower this year, and partly because selling state assets or telecom spectrum may not be a money-spinner.

The only way to avoid this outcome would be if India's new nationwide goods and services tax were hugely successful. But the GST is so poorly designed and shoddily implemented that its single biggest contribution this year may be to deprive exporters of working capital just when global growth is gathering momentum.

The Curse That Became a Blessing
Oil used to be a drag on India's public finances; but falling international crude prices gave New Delhi the chance to reap a windfall by boosting duties and cutting subsidies
Source: ICICI Securities
Note: FY18 figures are estimates.

On top of all this comes the cut in petroleum excise duties. This is a tax that fetches New Delhi three times as much money now as it did in 2014. By forgoing about one-tenth of that revenue to spur the RBI into action, the government has made things complicated for itself. An increase in world crude prices would spark a clamor by consumers for further reductions in petroleum taxes. At some point, India's bond markets will balk at financing a widening deficit at current yields.

To sidestep an attack by bond vigilantes, the government might have to cut its capital expenditure on roads, ports and other infrastructure. That could pinch growth even more, pushing back hopes for a revival in private investment. India Inc.'s uninspiring earnings would then droop further. With its hand-wringing, the RBI is leaving the patient in risky hands.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net