RBI Dovish Stance: Will Indian economy pick up pace this qtr? Stock mkts rise over 40% during Lockdown-Unlock phase till now; India Inc still suffering from liquidity, capacity utilization, supply-chain woes; Investors turn deaf ear to valuation concerns; Manufacturing profit outlook for Oct-Dec remains negative; Bank credit offtake sluggish in H1
Addressing the concerns over the sluggish demand that’s been daunting India Inc for the past six months, the Centre has come out with another round of package in an effort to fill the gaps. India Inc and economists have been pressing the issue that mere supply-side push alone can’t bring the trailing economy back on the track. The much-publicised $266-billion stimulus, amounting to 10 per cent of GDP, ‘Atmanirbhar Bharat’ failed to deliver the anticipated dividends during the past five months. This is further vindicated as the manufacturing outlook on profits is expected to be negative for October-December quarter, while inflation remains elevated, according to a latest report by Reserve Bank of India (RBI). Analysts said the real fiscal stimulus announced in May was only 0.8 per cent to 1.2 per cent of GDP. The almost unanimous opinion was that the balance -bank credit, loan guarantees and monetary measures announced by RBI amounting to more than $200 billion- could not be classified as a stimulus. However, IMF puts stimulus at four per cent of GDP.
Some countries focused on credit, loans and guarantees, some on non-fiscal measures. Economists opine that there wouldn’t be any rational for identifying a legitimate stimulus package as it depends upon the country’s economic situation, while highlighting the major reforming measures along with stimulus package taken by India. On the other hand, investors are chary of sustainability of the current rally on the domestic bourses. Will the domestic stock markets witness a possible correction as the key indices grew over 40 per cent from March lows. The market capitalization (mcap) of listed companies rose to a record high of Rs160.68 trillion. India’s ace trader Rakesh Jhunjhunwala recently said that India needs more stimulus support as long-term policy push will add value to the sluggish economy. “We don’t need a blind stimulus. I am more concerned about longer-term policy changes than the near-term stimulus. I believe Prime Minister Narendra Modi’s continuation as Prime Minister was very important as it would give him enough room to act on what he has envisaged. What worries me is Pakistan’s nuclear bomb, nothing else. The unknowns are always there, what can we do worrying about it,” said Jhunjhunwala, who took part in ‘CMT-2020 India,’ a virtual summit recently.
Union Finance Minister Nirmala Sitharaman announced few sops for central government employees. The LTC cash voucher scheme and special festival advance scheme, which are expected to create Rs28,000-crore worth consumer demand in the country. After the stimulus package, all eyes were on the RBI policy. But RBI in its latest MPC meeting, preferred to maintain status quo on repo rates. RBI retained its Dovish stance. RBI last time reduced Repo rate on May 22 from 4.4 per cent four per cent and maintained status quo on August 6 and October 9. While policy repo rate is not cut, RBI announced several other measures to help bring down interest rates in the market.
Dr Sangita Reddy, president, Ficci, said: “Ficci is happy to see the MPC signalling that it is going to support measures to energize growth. Given the evolving growth-inflation dynamics, there was a need to have clear focus on reviving growth. While the policy repo rate was not cut by RBI, several other measures were announced that should help bring down interest rates in the market.” Another major announcement in the policy, which reflects a Ficci suggestion, pertains to the housing sector where the lenders have now been given greater flexibility as the risk weight attached to housing loans will be determined by the loan to value ratio only.
Dr Reddy remarked that “this should give a fillip to the housing finance sector and encourage growth in housing loans and FICCI believes this will have a large multiplier impact on the growth of several other sectors.” Kamal Khetan, Chairman and Managing Director, Sunteck Realty Ltd, said: “Today’s RBI announcement of rationalizing risk weightage on home loans is a targeted intervention and comes at a time when the property sector is making a significant recovery across all the segments. The measure would provide a boost to the ongoing projects and inventory pick up for luxury developers. The homebuyers across all price-points will be able to access more capital with ease. Additionally, it would help the lender on the capital adequacy front and enable them to provide more loans. We expect RBI to extend the measure beyond March 2022 in the coming days.” The decision to increase the exposure limits on individual retail loans from Rs 5 crore to Rs 7.5 crore. Ficci is of the view that this would benefit both individuals and the small businesses that are currently gasping for liquidity support to keep themselves afloat. The industry body welcomed the move of extending the co-lending model to all NBFCs and HFCs, while Ficci feels that there is a need to simultaneously address some of the larger challenges that are being faced by the NBFC and HFC sector and enable them to support the economic revival process.
RBI decided to conduct a Rs1 lakh crore on-tap Targeted Long-Term Repo Operations (TLTRO). The banking regulator in its late March policy action introduced the TLTROs as a tool to enhance liquidity in the system, particularly the corporate bond market, in the wake of the Covid-19 crisis. RBI governor Shaktikanta Das said: “Fresh TLTROs will focus on providing liquidity support for revival of activity in specific sectors that have both b ackward and forward linkages, and multiplier effects on growth.”
The decision to discontinue the automatic caution listing system will benefit the exporters as it was a long pending request of Ficci and we are happy to see a positive move in this direction. The announcements to have on-tap TLTRO, enhancing the amount under Open Market Operations (OMO); laying out the plan to conduct open market operations in state development loans and giving banks further flexibility with regard to their SLR investments and extending the provision with regard to hold to maturity till March 2022 are all positive measures.
“These would help improve the flow of funds in the system while enabling banks to manage the liquidity situation without facing many frictions given the government’s own borrowing requirements,” said Dr Reddy. CHSS Mallikarjuna Rao, MD & CEO, Punjab National Bank, adds: “RBI has done a wonderful job of coming out with various measures, while maintaining the rates with an accommodative and pro-growth stance. For example, the on-tap TLTRO will go a long way to improve lending as we are looking at a strong economic recovery in the coming days. Similarly, the move to purchase of state development bonds, for the first time ever through open market operations, risk rationalization on home loans, which will boost the real estate sector, and the revision in regulatory limits for the retail portfolio to expand credit flow to small businesses are timely and growth-oriented.”
Sanjay Aggarwal, president, PHD Chamber of Commerce and Industry, said that calibrated and meaningful measures will have a multiplier effect on trade, industry and economy. “These measures will stimulate the consumer demand, boost capital expenditure and push the economic growth trajectory on the pre-Covid levels in the coming quarters,” he said. Kumar Rajagopalan, CEO of Retailers Association of India (RAI), said that “the LTC Cash Voucher Scheme would encourage spending on categories which attract a GST of 12 percent or more such as apparels, computers, consumer durables, smartphones, home appliances, furniture and home furnishings, beauty & personal care among others. The Special Advance Scheme for the festive season will boost festive spending.”
However, the measures have been criticised by some quarters. The Federation of Associations in Indian Tourism & Hospitality (FAITH), a body representing tourism and hospitality sectors which have been the worst hit by the pandemic, has expressed disappointment at the fact that LTC funds of government employees are being redirected to buy consumer goods. “Redirecting the LTC money of government employees to buy consumer goods would dry up those funds for the travel sector. Additionally, it would also send a vote of no confidence to the tourism travel & hospitality industry which was looking to get back on its feet after ‘Unlock,” FAITH said.
Turning to the outlook for inflation, Kharif sowing portends well for food prices. Pressures on prices of key vegetables like tomatoes, onions and potatoes should also ebb by Q3 with Kharif arrivals. On the other hand, prices of pulses and oilseeds are likely to remain firm due to elevated import duties. International crude oil prices have traded with a softening bias in September on a weak demand outlook, but domestic prices may remain elevated in the absence of any roll back of taxes.
Pricing power remains weak
Covid-19-related supply disruptions, including labour shortages and high transportation costs, could continue to impose cost-push pressures, but these risks are getting mitigated by progressive easing of lockdowns and removal of restrictions on inter-state movements. Taking into consideration all these factors, CPI inflation is projected at 6.8 per cent for Q2:2020-21, at 5.4-4.5 per cent for H2:2020-21 and 4.3 per cent for Q1:2021-22, with risks broadly balanced. Turning to the growth outlook, the recovery in the rural economy is expected to strengthen further, while the turnaround in urban demand is likely to be lagged in view of social distancing norms and the elevated number of Covid-19 infections.
While the contact-intensive services sector will take time to regain pre-Covid levels, manufacturing firms expect capacity utilisation to recover in Q3:2020-21 and activity to gain some traction from Q4 onwards. Both private investment and exports are likely to be subdued, especially as external demand is still anaemic. Taking into consideration the above factors and the uncertain COVID-19 trajectory, real GDP growth in 2020-21 is expected to be negative at (-) 9.5 per cent, with risks tilted to the downside: (-)9.8 per cent in Q2:2020-21; (-)5.6 per cent in Q3; and 0.5 per cent in Q4. Real GDP growth for Q1:2021-22 is placed at 20.6 per cent. The MPC is of the view that revival of the economy from an unprecedented Covid-19 pandemic assumes the highest priority in the conduct of monetary policy. While inflation has been above the tolerance band for several months, the MPC judges that the underlying factors are essentially supply shocks which should dissipate over the ensuing months as the economy unlocks, supply chains are restored, and activity normalises.
Mfg forecast for Oct-Dec remains negative
The bleak scenario for the industry is expected to continue for next couple of quarters as the businesses yet to revive amid the pandemic. The outlook for profit margins by Indian manufacturing companies continues to remain negative for the October-December quarter, according to RBI. RBI’s ‘Industrial Outlook Survey of the Manufacturing Sector for Q2:2020-21’ observes that respondents to its survey maintained negative sentiments on selling prices and profit margins in the July-September quarter, though pessimism moderated.
However, manufacturers expect further improvements in production, capacity utilisation and order books in Q3 of FY 2020-21. Going forward, respondents polled some recovery in the external demand situation and job landscape, the survey showed.
RBI in the report said: “The business expectations index (BEI) reverted to the expansion zone and stood at 111.4 in Q3:2020-21 from 99.5 in the previous quarter. Further, the overall financial situation and availability of finance portrayed optimism.” It noted that the overall business sentiment in the Indian manufacturing sector, as reflected by the business assessment index (BAI), surged from a record low at 55.3 in the first quarter of FY 2020-21 to 96.2 in the second quarter, though it remained in the contraction zone.
Bleak bank credit offtake in Apr-Sep
Despite huge cash reserves, the domestic banks are suffering from poor credit offtake. The lower interest rates failed to lure customers to avail of loans during the first half of the current financial year 2020-21. Experts attribute the reasons to the low credit offtake to the weak demand and persistent uncertainty amid the pandemic. RBI notes that “during H1 2020-21, bank credit offtake was anaemic, reflecting weak demand and uncertainty in the wake of the pandemic. Non-food credit growth (y-o-y) was 5.1 per cent as of September 25, 2020, lower than 8.6 per cent a year ago, driven by weak momentum and base effects. The slowdown in credit growth was spread across all bank groups, especially foreign banks.” Credit growth of the public sector banks remained modest, although with some uptick since March 2020. “Of the incremental credit extended by the scheduled commercial banks (SCBs) on a year-on-year basis (September 27, 2019 to September 25, 2020), 62.3 per cent was provided by the public sector banks and 41.2 per cent by the private sector banks, while the share of the foreign banks turned negative,” said the report. The deceleration in non-food credit growth was broad-based, with credit offtake slowing down in all the major sectors. Though personal loans and credit to agriculture registered some improvement in July 2020, the momentum could not be sustained in August.