India's April-Aug fiscal deficit passes 109% of full year budget target

 India's fiscal deficit in the five months to end August stood at Rs 8.7 trillion ($117.98 billion), or 109.3% of the budgeted target for the current fiscal year, government data showed on Wednesday.

Net tax receipts were Rs 2.84 trillion, while total expenditure was Rs 12.5 trillion, the data showed, indicating the government was facing a fall in tax receipts amid a rise in spending to combat the impact of the coronavirus.

The deficit is predicted to exceed 8% of GDP in the 2020/21 fiscal year that began in April, economists said, from initial government estimates of 3.5, mainly due to a sharp economic contraction triggered by the pandemic.

Even as Covid-19 rages, Indian economy's animal spirits are stabilising

 India’s economy showed signs of stabilizing in August with manufacturing and services gradually improving even as coronavirus cases escalated across the country.

Five of the eight high-frequency indicators compiled by Bloomberg News gained last month, while two were unchanged and one deteriorated. That kept the needle on a dial measuring so-called animal spirits steady at 4 -- a level arrived at by using the three-month weighted average to smooth out volatility in the single-month readings.

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A strong rebound is still a far way off though as a surge in virus cases continues to disrupt activity and has led many economists to downgrade their growth forecasts for the year.

Business Activity

Activity in India’s dominant services sector continued to pick up, with the main index rising to 41.8 in August from 34.2 in July. While that’s a marked improvement from April’s record low of 5.4, a number below 50 suggests it’s still in contraction territory.

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Manufacturing bounced back into expansion after four successive months of contraction, with the purchasing managers index rising to 52 from 46 in July. That helped push the composite index for August to 46 from 37.2 a month earlier.

Exports

Exports suffered because of tepid global demand, with shipments falling 12.7% in August from a year earlier. Farm exports and shipments of drugs and pharmaceuticals bucked the trend, growing 22% and 17%, respectively. On the imports side, demand for gold was strong ahead of the festival season, resulting in a widening in the trade deficit.

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Consumer Activity

Car sales, a key indicator of consumer demand, rose 14.1% in August from a year earlier, although the growth was from a weak base last year. Retail sales too showed signs of picking up, even though the number of consumers venturing out to buy goods was still 70% below the year-ago level, according to ShopperTrak.

Those increases didn’t translate into greater demand for loans. Central bank data showed credit grew 5.5% in August from a year earlier, slower than the 12% growth seen a year ago. To make matters worse, liquidity conditions tightened during the month.

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Industrial Activity

Industrial production fell 10.4% in July from a year earlier, shallower than June’s revised contraction of 15.8%. Capital goods output -- a key indicator of demand in the economy -- dropped 22.8% from a year earlier.

Output at infrastructure industries shrank 9.6% in July from a year ago and was slightly better than the 12.9% decline in June. The sector, which makes up 40% of the industrial production index, had contracted by a record 37.9% in April. Both data are published with a one-month lag.

As Covid ravages India, NBFCs ride out the storm with help of stimulus

The health of India’s shadow banks remained resilient in August, suggesting that record stimulus steps by the nation’s authorities are helping the crisis-hit sector ride out the pandemic.

Premiums on non-bank lenders’ bonds narrowed to a two-year low, according to an index of AAA rated five-year notes. Three other indicators compiled by Bloomberg, covering areas including liquidity and share performance, stayed steady from the previous month, with two at levels indicating strength.

India’s non-bank lending sector was hit by a crisis in 2018 when a large financier unexpectedly defaulted, and the nation now needs it to stay healthy in order to prevent gross domestic product from shrinking further. The reach of shadow banks extends into many corners of the economy, as they lend to a wide range of businesses from road-side teashops to tycoons.

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The central bank is propping up the industry, announcing some 100 billion rupees ($1.36 billion) of special liquidity last month to organizations that fund mortgage lenders and housing finance companies, and permitting banks to restructure some loans. This follows a 750-billion-rupee special credit line provided to non-bank financiers by the government in May.

But the cash influx from the authorities hasn’t dispelled concerns among investors about non-bank finance companies, known as NBFCs. There are worries that bad debt will rise in the sector as the lockdown to curb the spread of the coronavirus has battered the nation’s businesses and left millions jobless.

Debt Relief Panel May Add to Uncertainty Over India’s Bad Loans

“The funding challenges for NBFCs could mount again, especially for smaller NBFCs, on the back of Covid-19,” Sanjay Agarwal, senior director at Care Ratings, said in a note last week, as loan collections at shadow lenders declined after the central bank allowed a six-month moratorium on repayments.

The Bloomberg check-up of the sector’s health also showed that:

* Banking system liquidity remained buoyant

*Share prices of NBFCs that are part of benchmark S&P BSE 500 index stayed strong

*Outstanding debt of shadow lenders affected by the crisis remained unchanged

*The scores attached to each of the indicators have been calculated by Bloomberg by normalizing the deviation of the latest value of the indicator from its yearly average. They are assigned on a scale of 1 to 7, with 1 implying weakness and 7 showing strength.

Downward spiral: Industrial output shrinks by 1.1%; at nearly 7-year low

Industrial output crashed to an 81-month low in August, reducing by 1.1 per cent after a contraction in manufacturing output and a deepening slowdown in capital goods production pulled down growth.
Falling by the highest margin since November 2012, the index of industrial production (IIP) is now expected to remain muted this fiscal year.

“The IIP is likely to show an erratic, low-growth trend. The policy measures announced by the government after the first quarter GDP growth of 5 per cent are more of a supply-side intervention and unlikely to boost demand,” said Devendra Kumar Pant, chief economist at India Ratings & Research.
The manufacturing sector, which accounts for 78 per cent of the index, saw output turn negative for the first time this fiscal year.
Output fell 1.2 per cent in August after a rise of 4.6 per cent in July, showed the data released on Friday.
In July, it had risen by 4.6 per cent. Back then, economists had cautioned against interpreting the data as a revival of industrial production.
ChartTroubled manufacturing
The capital goods segment, a crucial sector that signifies investment, contracted 21 per cent. Contraction was 7 per cent in the previous month. Production in the category remained in the red for the seventh straight month.
“This connotes less demand for investment as well as stress in the financial sector. NBFC (non-banking financial company) liquidity has affected the supply of credit because banks have not been too willing to lend at the margin for large projects,” said Madan Sabnavis, chief economist, CARE Ratings.
Of the 23 sub-sectors within manufacturing, 15 recorded a year-on-year contraction. The IIP database showed a contraction in the automobile sector intensifying as production went down by 23 per cent in August while machinery production dipped by 21 per cent. Apparel, wood products, and basic metals continued to see healthy growth in August while paper and fabricated metal products were the biggest losers.
The production of electronic goods also turned negative, contracting by 3 per cent in August. This came after the government pushed manufacturing in the sector in a sustained manner over the past one year, through a series of benefits and a phased manufacturing programme aimed at reducing imports of electronics goods.
Consumer durables also contracted, posting a decline of 9.1 per cent after going down by 2.69 per cent in July. Consumer goods production had been slowing for some time, reflecting inventories that have built up in the third quarter of 2018-19, when capacity utilisation also improved. But, with demand tapering off, production has slowed, economists had pointed out. “Ecommerce sales reported in October do sound promising but it needs to be seen if this would have been at the expense of traditional sales from physical shops,” Sabnavis added.
Broadbased decline
Heavy rain in August is likely to have dampened construction activity in various states, contributing to the contraction in the output of infrastructure/construction goods, which went down by 4.5 per cent, after growing 3.5 per cent in July. This affected mining, which saw minimal growth at just 0.1 per cent against an expansion of 4.9 per cent in the previous month.
Electricity generation fell 0.9 per cent against a rise of 4.8 per cent in July.
“With the worsening in the performance of Coal India Ltd and electricity generation, and the continuing deep contraction in auto production in September 2019, it appears unlikely that the YoY decline in the IIP in August will be reversed in September,” said Aditi Nayar, principal economist, ICRA.
It is likely that GDP growth may not meaningfully accelerate in the second quarter of FY20, despite a favourable base effect, she said.

Power gencos' outstanding dues on discoms rise 57% to Rs 78K cr in August

The outstanding dues owed by distribution utilities to power producers rose around 57 per cent to Rs 78,020 crore in August 2019 as compared to the same month last year, reflecting a growing stress in the sector.
Distribution companies owed a total of Rs 49,669 crore to power generation companies in August 2018, according to web portal and app namely PRAAPTI (Payment Ratification and Analysis in Power procurement for Bringing Transparency in Invoicing of generators).

The portal was launched in May 2018 to bring a transparency in power purchase transactions between generators and discoms (distribution companies).
In August this year, total overdue amount, which was not cleared even after 60 days of grace period offered by generators, stood at Rs 59,532 crore as against Rs 34,464 crore in the same month in 2018.
Power producers give 60 days' time to discoms for paying bills for the supply of electricity. After that, the outstanding becomes overdue and generators charge penal interest on that in most of the cases.
In order to give a relief to power generation companies, the Centre has enforced a payment security mechanism from August 1. Under this mechanism, discoms are required to open letters of credit for getting power supply.
The data on the portal indicates that the outstanding as well as overdue amount have increased over the preceding month. In July 2019, the total outstanding on discoms was Rs 76,467 crore, while the total overdue amount was Rs 56,556 crore.
The July 2019 figures of dues and overdues have been revised upwards from Rs 73,748 crore and Rs 54,342 crore provisional numbers released last month on the portal.
ALSO READ: Power gencos outstanding dues on discoms jump 57% to Rs 73,000 cr in July
Discoms in Rajasthan, Jammu and Kashmir, Telangana, Andhra Pradesh, Karnataka, Tamil Nadu account for the major portion of dues to power generating companies, taking a longer duration of up to 820 days to make payments, the portal showed.
Among major states, Andhra Pradesh tops the list with 852 days to make payments, followed by Rajasthan (851 days), Haryana (849 days), Madhya Pradesh (836 days) Telangana (829 days) and Tamil Nadu (823 days) in that order.
Delhi takes 878 days to make payments to power generating firms.
Overdues of independent power producers amount to over 24.6 per cent of the total overdue of Rs 59,532 crore on discoms.
Among the central public sector power generators, NTPC alone has an overdue amount of Rs 8,452.58 crore on discoms, followed by NLC India at Rs 4,691.49 crore, NHPC at Rs 2,324.05 crore, THDC India at Rs 1,936.11 crore and Damodar Valley Corporation at Rs 805.71 crore.
Among private generators, discoms owe the highest overdue of Rs 3,794.49 crore to Adani Power, followed by Bajaj Group-owned Lalitpur Power Generation Company Ltd at Rs 2,212.66 crore and GMR at Rs 1,829.68 crore.

India's animal spirits are hushed as consumer demand remains subdued

India’s economic growth showed little signs of a recovery from a six-year-low, with investment and consumption activity in August remaining fairly subdued.
The dial on a gauge measuring overall economic activity was stuck in the same position as the previous month, with two of the eight high-frequency indicators compiled by Bloomberg News showing weakness and five others staying steady. Car sales in August slumped the most on record while demand for bank loans weakened, underlining worsening consumer spending.

The dashboard measures “animal spirits” -- a term coined by British economist John Maynard Keynes to refer to investors’ confidence in taking action -- and uses the three-month weighted average to smooth out volatility in the single-month numbers.
The reading, which comes ahead of the central bank’s monetary policy decision next week, strengthens the case for more measures to bolster growth. Since late August, the government has unveiled a series of steps, including $20 billion in corporate tax cuts, to support the economy after growth cooled to 5 per cent in the quarter ended June -- the weakest expansion since March 2013.
Here are the details of the dashboard:
Business Activity
Activity in India’s private sector eased in August from a month ago, reflecting a slowdown in new business. The weakness in both manufacturing and services activity was reflected in the purchasing managers surveys, contributing to a fall in the composite index to 52.6 during the month from 53.9 in July.
While input prices for services and the manufacturing sector rose during the month, manufacturers refrained from passing on costs amid efforts to boost sales.
Subdued price pressures are likely to give the central bank space to continue easing monetary policy, after already lowering the benchmark interest rate by 110 basis points so far this year.
Exports
Exports fell 6.1 per cent in August from a year earlier, against a 2.3 per cent rise in the previous month, with economists attributing the decline to an adverse global trading environment, and base effects. Weak domestic demand dragged down imports, helping keep the trade gap broadly unchanged from a month ago.
Consumer Activity
Consumer spending was muted, including in rural areas. That backs a recent report by market researcher Nielsen that lowered its 2019 growth forecast for the fast-moving consumer goods sector to 9 per cent-10 per cent from an earlier estimate of 11 -12 per cent.
Urban consumers curtailed spending as well, as the growth slowdown triggered fear of job losses.
That sentiment is weighing on demand for loans, with overall credit growth reaching 10.3 per cent in August -- the slowest pace of expansion in more than a year -- and down from 14.2 per cent in April, according to central bank data.
The Citi India Financial Conditions Index, a liquidity indicator, showed overall conditions tightening.
Industrial Activity
India’s core infrastructure industries’ output, which constitutes 40 per cent of total industrial production, grew 2.1 per cent in July from a year ago. The data offered mixed cues, with moderately healthy growth in cement and steel offsetting a contraction in coal, crude oil, natural gas and refinery output.
Industrial output growth accelerated to 4.3 per cent in July from 1.2 per cent in June. While the headline number showed a bounce, the production of capital goods -- an important indicator of future demand-- contracted for a third straight month. Both core sector and industrial output numbers are reported with a one-month lag.

Exports contract 6% in August, trade deficit narrows to $13.45 billion

Exports in August contracted for a second time in the current fiscal year as poor performance plagued all major foreign-exchange earners such as petroleum oil, gems and jewellery, and engineering goods.
Outbound trade dropped 6.05 per cent after rising by 2.25 per cent in July. According to the data released by the commerce and industry ministry on Friday, exports stood at $26.13 billion in the month.

Imports, which contracted for a third straight month, dipped by 13.45 per cent in August, the highest fall this fiscal year. Consequently, the trade deficit stood at $13.45 billion in August, the second-lowest in the first five months of the current fiscal year.
Bleak exports
Seven of the 30 major export sectors saw contraction, showing low demand for both consumer and industrial items, a hallmark of a slowdown. Critical exports such as those of processed petroleum took a beating with receipts falling by more than 10 per cent to $3.31 billion. In July, this category had shown a better performance with a lower fall of 5 per cent. This had been due to major refineries in Jamnagar and Mangalore staying shut. Recently, senior government officials had said they expected exports in the sector to go up soon.
For gems and jewellery, the contraction that had gripped the sector periodically since November continued in August, when the sector contracted by 3.54 per cent to ship out $3.21 billion worth of goods. Exports of gems went down 6.54 per cent in July. The pace of exports has been hit in the sector, as fund availability dried up in the aftermath of the Nirav Modi scam.
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After being one of the growth drivers in the previous fiscal year, engineering goods fell by a heightened 9.35 per cent. The pace of contraction had been 1.69 per cent in July, with the sector accounting for nearly 25 per cent of the foreign exchange earned. “We need to fix issues like high raw material cost, mainly of steel,” Engineering Exports Promotion Council Chairman Ravi Sehgal said.
Export of readymade garments, in which India’s export competitiveness has fallen over the past fiscal year, contracted by 2.44 per cent in August. The sector had shown signs of steady recovery in July with 7.66 per cent growth. Only eight of the 30 major product groups were in positive territory. They included electronic goods, iron-ore, ceramic products, and processed mineral.
“All major sectors of exports, including almost all labour-intensive sectors, besides petroleum, were in negative territory, showing decelerating trends. The slowdown in chemical and plastics exports is particularly worrisome because we were growing in those,” said Sharad Kumar Saraf, president of the Federation of Indian Export Organisations.
Exports of non-oil and non-gems and jewellery products declined by 5.61 per cent in August.
Import slide
The largest component of the import bill — crude oil — saw the cost of inbound shipments fall by 8.9 per cent to $10.87 billion in August. Crude oil imports had gone down by a massive 22 per cent in the previous month.
However, the second-largest item in the import bill — gold — fell by a massive 62 per cent, the contraction speeding up from a 42 per cent fall in July. Imports of the metal had continued to see an uptick in early 2019 before crashing since June even as the industry had continued to see volatility.
“The YoY contraction in imports of items such as transport equipment, machinery and fertilisers should be viewed with caution, as they suggest that the underlying demand dynamics are weak,” Aditi Nayar, principal economist at ICRA, said.
Non-oil, non-gold imports, a sign of domestic industrial demand, fell for the 10th straight month in August, contracting by 9 per cent. “Led by sectors such as transport equipment and machinery, this provides a cautionary signal regarding the strength of underlying economic activity,” said Nayar.
The current account deficit is likely to decline substantially to $10-11 billion in the second quarter on the back of moderate crude oil prices and weak appetite for gold imports, she said.

Manufacturing growth down at 15-month low in August on demand slowdown: PMI

The country's manufacturing sector activity declined to its 15-month low in August, owing to slower increases in sales, output and employment, a monthly survey said on Monday.
The IHS Markit India Manufacturing Purchasing Managers' Index (PMI), fell to 51.4 in August, its lowest mark since May 2018, from 52.5 in July, as most survey indicators fell since July to signal a widespread loss of momentum.

This is the 25th consecutive month that the manufacturing PMI has remained above the 50-point mark. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.
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"August saw an undesirable combination of slowing economic growth and greater cost inflationary pressures in the Indian manufacturing industry," Pollyanna de Lima, Principal Economist at IHS Markit said, adding that "most PMI indices moved lower, including key health-check measures for new orders, output and employment".
India's economic growth has slumped for the fifth straight quarter to an over six-year low of 5 per cent in the three months ended June as consumer demand and private investment slowed amid deteriorating global environment.
In August, sales expanded at the slowest rate in 15 months, following which production growth and job creation were tamed. Moreover, factories lowered input buying for the first time since May 2018.
"Another worrying sign was the first drop in input buying in 15 months, which reflected a mixture of intentional reductions in stocks and shortages of available finance," Lima said.
The survey noted that competitive pressures and challenging market conditions restricted the upturn. New orders from overseas also increased at a slower rate in August, with growth the weakest seen since April 2018.
"Until manufacturers are willing to loosen the purse strings, it is difficult to foresee a meaningful rebound in production growth on the horizon," Lima said.
Subdued sales to domestic and international clients in turn curbed output growth, which softened to the weakest in a year. Some survey members also reported cash flow problems and a lack of available finance.
On the employment front, the survey said weak sales prevented manufacturing firms from replacing retirees and voluntary leavers.
Going ahead, goods producers maintained optimistic growth projections, with hopes of a pick-up in demand and marketing efforts predicted to support output in the year ahead. Sentiment strengthened to a 16-month high.
On the prices front, the measure of input costs accelerated to a nine-month high.
"Another factor restricting quantities of purchases was a pick-up in the rate of increase in input prices. While not alarming, the acceleration in cost inflation may restrict central bank stimulus to the economy in the near-term," Lima said.
The government on Friday also announced its second of the three-part stimulus, merging 10 public sector banks into four with a view to boost credit to help revive the economy.
A week prior to this announcement, the first stimulus package was unveiled that included reduction of taxes, improvement of liquidity in the banking sector (formal and shadow), increased government spending on auto and infrastructure, and accelerated refunds of Goods and Services Tax (GST).
This was followed by liberalisation of foreign investment rules in four sectors -- coal mining, contract manufacturing, single-brand retail and digital media.
A third and possibly last package, expected in the next few days, may deal with issues facing the realty sector.
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

Auto sales in August to be 'far worse' than July, analysts expect 30% fall

The slowdown nightmare for the automobile industry is expected to continue for August as analysts estimate an overall sales downfall of up to 30 per cent.
In a survey conducted by IANS, industry experts were quick to point out that August will be far worse in sales than July, especially due to havoc caused by Monsoon rains across India.
They estimated that sector might face an overall sales downfall of up to 30 per cent on a year-on-year basis, with passenger vehicle segment being the worst hit.
Interestingly, this year August came just ahead of the festive season and before the slew of growth inducing measures announced by the government.
ALSO READ: Slow down blues: Auto industries banking on new launches to revive demand
"The turnaround in the industry is months away since any of the measures recently taken to deal with the sales slowdown or to prop-up consumer sentiment will take time to bring a turnaround," Grant Thornton India LLP Partner, Sridhar V. told IANS.
"All in all, August seems to be a similar or even worse sales glide path than July."
At present, the sector has been impacted by a consumption slowdown which is a culmination of several factors like high GST rates, farm distress, stagnant wages and liquidity constraints.
Besides, inventory pile-up at the dealership level and stock management of unsold BS-IV vehicles have become a problem for the sector.
Consequently, the industry's production levels have also receded as demand plunged, eventually leading to job losses.
These factors led the Finance Minister last week to come out with a major economic booster package.
ALSO READ: Slow down blues: Auto industries banking on new launches to revive demand
"There might not be any major improvement in August sales numbers on the back of government's recent measures to improve liquidity and to revive demand, however, as months progress and we come closer to the main festive season (October) there might be some turnaround," Snehdeep Bohra, Associate Director with Fitch Ratings told IANS.
Lately, all major OEMs consisting of passenger, commercial, two and three wheeler manufacturers have reported a massive decline in domestic sales.
Figures from the Society of Indian Automobile Manufacturers (SIAM) showed that industry which has recorded an overall decline of 18.71 per cent in off-take for July, the highest monthly sales de-growth in the last 19 years.
"Sales deferment due to upcoming festival season and monsoons combined with flooding across several parts of the country will have an impact on August sales," Rahul Mishra Principal at A T Kearney told IANS.
"Except for two-wheeler and the SUV segment temporarily supported by incentive schemes and new launches respectively, there might not be any positive improvement in August retail sales."
ALSO READ: Automakers welcome govt sops but are divided on festival season impact
As per SIAM figures, domestic passenger car sales in July plunged by 35.95 per cent to 122,956 units against 191,979 units sold in July 2018.
Overall, passenger vehicle sales declined 30.98 per cent in July to 2,00,790 units against 2,90,931 units in the year-ago month. In the commercial vehicle segment, sales were down by 25.71 per cent to 56,866 units.
In case of two-wheelers, which include scooters, motorcycles and mopeds, the sale edged lower by 16.82 per cent to 15,11,692 units.
According to a research note by Motilal Oswal Financial Services: "Our interaction with leading PV or 2W or CV channel partners still indicates no signs of demand recovery at retail levels, as inquiries to sales remains tepid."
"Feedback on pre-festive demand is not very encouraging, partly impacted by floods in several parts of the country and demand deferment in anticipation of some sops from the government. Most OEMs continued their inventory cutting efforts through production cuts in August 2019."

FPIs remain in sell-off mode, pull out Rs 9,197 cr in August so far

Continuing with their selling spree, foreign investors pulled out a net amount of Rs 9,197 crore in just seven trading sessions in August due to unconducive domestic and global factors.
However, analysts said the trend may reverse if the government addresses the tax concerns of overseas investors.

According to latest depositories data, foreign portfolio investors (FPIs) withdrew a net amount of Rs 11,134.60 from equities while pumping in Rs 1,937.54 into the debt segment during August 1-9, taking the total net withdrawal to Rs 9,197.06 crore.
In the preceding month, FPIs were net sellers in the Indian capital markets (equity and debt) to the tune of Rs 2,985.88 crore.
Overseas investors have been on a selling spree ever since higher tax on FPIs registered as trusts and association of persons was announced in the Union Budget for 2019-20, experts said.
According to Vinod Nair, head of research at Geojit Financial Services, FPIs have been cautious due to slowdown in the global economy, with the US, Euro economies and China posting muted GDP growth numbers. There are fears that this slowdown can get extended given the uncertainty on the US-China trade agreement, Brexit and other geopolitical issues.
Given the situation, earnings growth is moderating while valuation is expanding. As a result, equity is losing its attractiveness as an investment class and funds are shifting to safe-haven assets like bonds and gold, he added.
Himanshu Srivastava, senior analyst manager research at Morningstar, said, "While there has been a marked slowdown in the country's economic activity, sub-par monsoon and weak earning season, globally, tension between US and Iran and continued trade war between US and China too hasn't augured well for India,"
However, "there is still a ray of hope for FPIs as the talks are going on that the government may consider rolling back or providing some relief to foreign investors from higher surcharge," Srivastava added.

RBI monetary policy poll: Majority see 25 bps cut, more can be in store

Economists and market participants expect at least a 25-basis point cut in policy rates in the August 7 monetary policy review — and some more in the coming policies — to tackle the growth slowdown.
Inflation concerns seem to be behind us till such time that commodity prices start firming up. In an environment of trade wars, where global growth has itself taken a hit, it is unlikely that commodities will be in much demand either.
Of the 15 economists and market players who participated in the poll, two predicted a 50-basis point cut, while the rest anticipated a rate reduction by 25 basis points (bps). But by no means economists see the Reserve Bank of India (RBI) to stop at just a 25-bp cut. Some of the economists such as Soumyakanti Ghosh of State Bank of India (SBI) are of the firm view that rates have room to fall by a total of 75 bps in the current financial year, starting with 25 bps in the August 7 policy.
“We expect the RBI to cut by 25 bps on August 7. We also believe the rate cut could be in multiples of 25 bps. We are now in a synchronised rate-cutting cycle by central banks across the world, and this looks even different from 2008. There is also a pressing need for the central bank to define an equilibrium real interest rate,” Ghosh said.
Aditi Nayar, principal economist of ICRA, sees one rate cut of 25 bps, followed by a pause.
“An increasing risk to the already slowing global economy from the US-China trade dispute further increases the uncertainty. We see scope for a cumulative 50-bp rate cut in the months ahead, with 25 bps in the upcoming policy,” said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank.
Even as the rate decision will be data dependent, the absence of hawkish Viral Acharya in the six-member monetary policy committee (MPC) could help gather a consensus on rate cuts.
Banks have started lowering their rates, starting with deposit rates, and this will lead to lending rate cuts in the coming days.
Abheek Barua, chief economist of HDFC Bank, expects a 25-bp rate cut now, and then another at a latter policy date. “The critical factor now is the liquidity framework that the RBI might announce in the policy, or soon after the policy,” Barua said. According to economists, the new framework would likely spell out clearly if the system would be in the liquidity surplus or deficit mode and what would be the factors that determine that. The RBI in a previous policy had said the present liquidity framework had become out of sync with the real situation on the ground.
Siddhartha Sanyal, newly appointed chief economist and head of research at Bandhan Bank, said he expected the central bank to lower policy rates by 50-75 bps in total, including 25 bps in August. “Growth momentum remains subdued. Headline inflation stays low, with a markedly weak core inflation print. Erratic rains can potentially pose upside pressure on food inflation in the near term, but that will likely remain short-lived. Globally, central banks have turned more dovish in recent months,” Sanyal said.
Chart Consumer Price Index (CPI) inflation stood at 3.18 per cent in June. The RBI tries to keep inflation under 4 per cent. Growth, however, is at around 7 per cent, below its potential.
“Based on a variety of activity indicators and a weakening global economic momentum, it is quite likely that domestic growth, especially over the first half of the year, would underperform the RBI’s estimates and as a result the slack in the economy would increase,” said Gaurav Kapur, chief economist of IndusInd Bank.
While inflation remains under control, “the need for more monetary stimulus to support growth is quite clear, even as past rate actions gradually translate into lower lending rates and help drive a recovery,” Kapur said.
Kapur, along with other economists, expects it would be important to ensure comfortable liquidity conditions to help improve the flow of credit and to help bank transmit the policy rate cuts.
The bond yields, meanwhile, have fully factored in a rate cut, and have fallen about 60 bps in July. According to Ramkamal Samanta, vice president, investment, at SUD Life Insurance, a 25-bp cut at this point would be desirable, “with a clear communication about the liquidity stance of the RBI”.
Apart from cutting rates and lowering growth forecasts, the RBI policy might announce some concrete steps for the NBFC segment as well, said Rupa Rege Nitsure, group chief economist of L&T Finance.
However, despite rate cuts, there is no guarantee that consumers could be made to buy goods, or companies to invest in new projects, economists fear.
“It remains to be seen how much rate cuts help in reviving demand in the economy,” said Devendra Pant, chief economist of India Ratings and Research.