Govt failure to appoint MPC members injects more uncertainty in the economy

 India’s government injected more uncertainty into the economy this week, failing to act in time to appoint members to the central bank’s panel that decides interest rates.

The Reserve Bank of India deferred its three-day interest-rate meeting due to start Tuesday, without giving any reasons or a new date for its policy decision. The six-person Monetary Policy Committee is currently without three external members after their terms expired last month. Rules require at least four MPC members to be present at a meeting.

The government failed to make use of the ample time it had to appoint new MPC members, sowing more confusion into financial markets. The RBI has been doing most of the heavy lifting in providing stimulus to the economy this year, given limited fiscal room available to Prime Minister Narendra Modi’s government.

“This is shambolic,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “The government and RBI had at least three months time to appoint members and yet they have failed. Monetary policy was the only lever providing support to the economy and such uncertainty doesn’t help.”

MoneyControl website reported the government has selected the new MPC members, but has delayed announcing them until it completes processes like background and security checks. The new MPC could meet as early as next week, the website said, citing a senior government official.

Govt failure to appoint MPC members injects more uncertainty in the economy

This week’s rate decision was due to be announced on Thursday, with most economists predicting the RBI would keep its benchmark interest rate unchanged at 4%. The RBI had cut rates by 115 basis points this year and pumped in billions of dollar of liquidity into the financial system to support the recovery.

One-month dollar-rupee non-deliverable forwards were little changed at 73.99 as of 6:54 a.m. in Mumbai.

The government’s delays are not just limited to MPC appointments, with authorities moving slowly to provide fiscal support. Finance Minister Nirmala Sitharaman in May unveiled a 21 trillion-rupee ($285 billion) economic package, equivalent to 10% of gross domestic product, but the actual fiscal cost worked out to just about 1% of GDP. That prompted many, including Governor Shaktikanta Das, to call for more stimulus, yet little has been forthcoming to date.

Anurag Thakur, the junior finance minister, said in June the government was still considering further support, and that while “announcements have been paused, action toward implementation continues.”

The economy posted a record 23.9% contraction in the June quarter from a year ago, the most among all major economies tracked by Bloomberg. Goldman Sachs Group Inc. is predicting the economy will shrink 14.8% in the fiscal year through March 2021.

The Modi administration is due to announce its financial year second-half borrowing this month, and is expected to further increase it from a record 12 trillion rupees.

Lengthy Process

In India, appointments to key positions by the government -- from heads of state-run banks to deputy governors at the RBI -- can be a lengthy process fraught with delays.

The central bank had earlier this year written to the government to extend the tenor of the three external members of the MPC -- Chetan Ghate, Ravindra Dholakia and Pami Dua -- in order to maintain continuity in policy during the pandemic. The government instead formed a panel to select new members, people with knowledge of the matter said in July.

“One hopes that the government recognizes the urgency of the matter,” said Rudra Sensarma, professor of economics at the Indian Institute of Management in Kozhikode. It’s “surprising that the government has not decided on the new appointees which is of utmost importance to preserve the credibility of the RBI’s decision making,” he said.

'Would be massive': Paytm Money looks to tap India's stock trading mania

 India’s highly competitive stock broking industry has a fierce new challenger.

Paytm Money, a unit of the nation’s largest digital-payments startup Paytm which is backed by Chinese billionaire Jack Ma’s Ant Group, is aiming to build a top stock broker by helping local retail investors avoid the biggest investing hazard: getting burned during a down cycle and quitting for good.

The app made zero-fee stock trading available to its millions of users last month. It plans to put algorithms to work so India’s young, smartphone-savvy newbie investors can be nudged to exit loss-making trades and book profits at the right opportunity.

The newcomer is stoking competition among Indian brokerages rushing to give hungry traders the perfect platform. Nimble, technology-focused online brokers are pulling ahead of older established rivals by offering easy-to-use platforms with minimal charges. Unable to keep up with falling prices and fast-paced online services, smaller players have been rapidly closing their doors, with about three quarters of brokers shutting shop in the last six years.

“There is a big debate about who will survive in the Indian broking industry because there is a lot of disruption,” said Kranthi Bathini, a director at Mumbai-based WealthMills Securities Pvt. “Paytm is very well known, their brand has reach. They could create big awareness about stock investing in India.”

The launch of the app could hardly be better timed. Like the Robinhood craze in the U.S., Indians have been drawn to the stock market this year. Four and a half million individuals had opened trading accounts in the first seven months of this year, compared with less than three million in all of last year, according to data compiled by Central Depository Services Ltd.

Paytm, whose parent One97 Communications is valued at $16 billion, has become a fintech leader in India. It was founded a decade ago by Vijay Shekhar Sharma to offer digital payments in a market that Credit Suisse Group AG forecast to reach $1 trillion by 2023. The Ant Group has a 30.33% stake in One97.

‘Would be massive’

Paytm has a user base of about 80 million for its payment services, according to Vivek Bajaj, co-founder of StockEdge, an education and research platform for retail investors. “If they bring 10 million of those users into the stock market, it would be massive.”

While concerns are growing on the increasingly speculative nature of retail stock wagers, the surge in demand for online and mobile-based broking services has sparked innovation in India. Brokers are racing to offer new features such as access to U.S. markets to stay ahead, while keeping fees rock bottom.

“Pricing has become commoditized, so whichever broker adds more value will prevail,” said Bajaj.

Some of the ways in which Paytm Money hopes to stand out include features that could allow users to automate the entry, exit and monitoring of investments in various securities, Varun Sridhar, chief executive officer, said in an interview. Another planned innovation to lure users is to add resources for investor education. The app currently has the ability to set up scheduled monthly investments in individual stocks -- which has proved popular in mutual funds.

“In three years time, we would like to be either number one or two with a 10-15% market share,” said Sridhar.

(With assistance from Sanjit Das.)

Indian economy staring at double-digit decline as Covid-19 cases spike

 India’s economic recovery prospects have gone from bad to worse after the nation emerged as a new global hotspot for the coronavirus pandemic with more than 5 million infections.

Economists and global institutions like the Asian Development Bank have recently cut India’s growth projections from already historic lows as the virus continues to spread. Goldman Sachs Group Inc. now estimates a 14.8% contraction in gross domestic product for the year through March 2021, while the ADB is forecasting -9%. The Organisation for Economic Co-operation and Development sees the economy shrinking by 10.2%.

The failure to get infections under control will set back business activity and consumption -- the bedrock of the economy -- which had been slowly picking up after India began easing one of the world’s strictest and biggest lockdowns that started late March. Local virus cases topped the 5 million mark this week, with the death toll surpassed only by the U.S. and Brazil.

“While a second wave of infections is being witnessed globally, India still has not been able to flatten the first wave of infection curve,” said Sunil Kumar Sinha, principal economist at India Ratings and Research Ltd., a unit of Fitch Ratings Ltd. He now sees India’s economy contracting 11.8% in the fiscal year, far worse than his earlier projection of -5.8%.

Goldman Sachs’s latest growth forecast came last week after data showed gross domestic product plunged 23.9% in the April-June quarter from a year ago, the biggest decline since records began in 1996 and the worst performance of major economies tracked by Bloomberg.

Chart

While there are some signs that activity picked up following the strict lockdown, a strong recovery looks uncertain.

“By all indications, the recovery is likely to be gradual as efforts toward reopening of the economy are confronted with rising infections,” Reserve Bank of India Governor Shaktikanta Das told a group of industrialists Wednesday.

Lower Potential

The central bank will likely release its own growth forecast on Oct. 1 when the monetary policy committee announces its interest rate decision. In August, the RBI said private spending on discretionary items had taken a knock, especially on transport services, hospitality, recreation and cultural activities.

The plunge in GDP, as well as ongoing stress in the banking sector and among households, will curb India’s medium-term growth potential. Tanvee Gupta Jain, an economist at UBS Group AG in Mumbai, estimates potential growth will slow to 6% from 7.1% year-on-year estimated in 2017.

What Bloomberg’s Economists Say

India went into the Covid-19 pandemic already suffering a downward trend in growth potential. We expect a 10.6% contraction in fiscal 2021, rebound in 2022, and slower path for growth as scars from the virus recession drag on the remaining years of the decade.

Abhishek Gupta, India economist

In addition to that, corporate profits have collapsed, putting a brake on investments, which in turn, will curb employment and growth in the economy.

Chart

India is “likely to see a shallow and delayed recovery in corporate sector profitability over the next several quarters,” said Kaushik Das, chief economist at Deutsche Bank AG in Mumbai, who has downgraded his fiscal year growth forecast to -8% from -6.2%. That will “reduce the incentive and ability for fresh investments, which in turn will be a drag on credit growth and overall real GDP growth,” he said.

India's deepening economic slowdown opens the door for more rate cuts

India’sdeepening economic slowdown is likely to throw open the door to more monetary policy easing this week.
The Reserve Bank of India will meet days after a report showed growth collapsed to 4.5 per cent in the July-September quarter, the first time it’s been below 5 per cent since 2013.

Led by Governor Shaktikanta Das, the RBI already has cut interest rates by 135 basis points in five moves this year, the most by any Asian central bank. Policy makers have had their focus squarely on reviving Asia’s third-largest economy, and last week’s weak data gives them added reason to continue pushing for growth.
“The weak numbers emphatically underscore the need of policy focus on growth,” said Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai. “We are expecting the RBI to execute another rate cut of 25 basis points at its next meeting.”
Last quarter’s growth slump showed a contraction in manufacturing and subdued investments. It was only government spending that bolstered the economy, with private consumption still fairly low key.
A slew of high-frequency indicators suggest the slowdown extended into October. The central bank may be pushed to lower its growth forecast for the fiscal year through March 2020 from 6.1 per cent, with economists in a Bloomberg survey already predicting expansion of just 5.6 per cent.
“We expect the central bank to take note of the downward surprises in the data versus forecasts and acknowledge a deeper-than-expected slowdown in economic activity,” said Rahul Bajoria, a senior economist at Barclays Bank Plc. in Mumbai. He expects the central bank to cut the repurchase rate by 40 basis points over the remainder of the fiscal year.
In the interest-rate swap market, investors are betting the repurchase rate -- which is currently at 5.15 per cent -- will be 5 per cent in the next 12 months, while economists are forecasting it at 4.75 per cent by the end of March as growth remains subdued in coming months.
Despite the monetary stimulus and a slew of government measures to boost the economy -- including a $20 billion tax bonanza to companies -- a recovery looks uncertain.
Businesses have cut back on investments, preferring to repay loans instead, while consumers have curbed spending, fearing more job losses. The rural economy remains weak and borrowing is hamstrung by debt-laden banks and a crisis-ridden shadow lending sector.
Banks also haven’t passed on all of the 135 basis points of RBI’s rate cuts to borrowers, leaving policy makers frustrated.
Monetary policy space is slowly closing as inflation starts to accelerate. Consumer prices rose 4.62 per cent in October from a year earlier, the first reading above 4 per cent -- the RBI’s medium-term target -- since July 2018, and the highest since June last year.
The spike was driven by a surge in onion prices, although core inflation -- which strips out volatile food and fuel prices -- had slowed to 3.4 per cent.
“For the RBI, it presents a tough policy dilemma of overshooting inflation, undershooting growth and a fragile fiscal state,” said Madhavi Arora, an economist at Edelweiss Securities in Mumbai. “Nonetheless, the weak quarterly GDP print will validate our call for further easing by the RBI by at least another 50 basis points in this cycle, despite an uptick in inflation beyond the 4 per cent comfort zone.”