New Delhi: India’s growth rate is expected to accelerate over the coming year and is likely to improve further to 7.6 per cent by 2019-20 as key sectors would revive from disruptions related to the implementation of GST and demonetisation, says an HSBC report.
According to the global financial services major, GDP growth in India is expected to accelerate to 7.0 per cent in 2018-19 from 6.5 per cent in this fiscal, shaking off the disruptions from demonetisation and introduction of the Goods and Services Tax (GST).
“India’s growth story has a two-part narrative. The first is a slowdown and gradual recovery in the short run, likely over FY18 and FY19, as key sectors revive from disruptions related to the implementation of GST,” HSBC said in a research note.
The subsequent narrative is of brighter growth prospects in the medium term (FY20 and beyond), when growth is expected to reap the benefits of recently undertaken structural reforms, it added.
HSBC expects India’s growth at around 6.5 per cent in 2017-18, 7.0 per cent in 2018-19 and 7.6 in 2019-20, respectively.
The report further said the recovery in India’s GDP growth will likely be relatively gradual, preventing price pressures from rebounding and allowing the Reserve Bank of India to keep rates on hold for the time being.
According to HSBC, once the impact of transient factors wanes, inflation will settle around RBI’s 4 per cent target.
“We expect inflation to average 3.4 per cent over FY18 (ending the year in March at 4.3 per cent),” it said adding “accordingly, we forecast RBI will keep the repo rate on hold, as the rate-cutting cycle of the central bank looks set to have ended, with most inflation risks tilted to the upside”.
The Reserve Bank in its fifth bi-monthly review of this fiscal kept repo rate unchanged at 6 per cent and reverse repo at 5.75 per cent while raising the inflation forecast for the remainder of 2017-18 to 4.3-4.7 per cent.
RBI Governor Das, bankers may not be on same page over passing rate cuts
Mumbai: Reserve Bank of India (RBI) Governor Shaktikanta Das will meet bank chiefs to impress upon the need to improve transmission within the confines of it being a business decision. However, certain indicators suggest that bankers won’t be wrong in disagreeing with Das on the all-important rates issue.
So far, only State Bank of India (SBI) has reduced its home loan rates (up to Rs 30 lakh) by only five basis points (bps) after the policy rate cut of 25 bps on February 7.
High credit deposit (CD) ratio, with incremental ratio over 100 (indicating credit disbursement is more than deposit mobilisation) leaves banks with no room to cut deposit rate. They cannot cut lending rates without cutting deposit rates. Even when deposit rates are pared, because of their fixed nature, the cost of deposit doesn’t come down readily. Contrary to that, the lending rate cut immediately translates into hit on profitability.
Pallab Mahapatra, managing director and chief executive officer of Central Bank of India, said his bank’s marginal cost-based lending rate (MCLR) for one year and deposit rates are already lower than many large banks. For reducing loan rates further, the bank will have to cut deposit rates further, which would make the bank vulnerable to poaching for deposits from competing banks. And this, therefore, makes transmission a challenge.
One reason why the banking system is also increasingly getting vulnerable to rates is because the low cost current and savings account deposits (CASA) are running down as a share, whereas costly bulk deposits are increasing because of liquidity tightness in the banking system.
The system liquidity was running a deficit of more than Rs 1 trillion as on Tuesday, having improved from Rs 1.13 trillion on February 18. This is despite RBI’s bond purchases from the secondary market reaching about Rs 2.7 trillion. The liquidity deficit will only increase with tax-related outflow from companies in the coming days. “Liquidity is leaking from other channels also, for example, high currency in circulation (CIC) in an election year,” said a senior economist.
Latest data shows currency in circulation, as on February 15, was at Rs 21.06 trillion, compared with pre-demonetisation level of Rs 17.97 trillion. The growth in CIC on a year-on year basis was 18.4 per cent, much higher than the normal 13-14 per cent even in busy periods.
Clearly, the RBI’s record open market operations (OMO) was not enough when supply of bonds remained elevated, and while not much of dollars are flowing into the country.
Growths set to slow down to 6-6.5% in H1 of 19: Nomura
Mumbai: Despite the almost lose fiscal and monetary policies, the economy is likely to slow down to 6-6.5 percent in the first half of 2019, due to weak global demand, political uncertainty and tighter financial conditions, says brokerage report.
The Reserve Bank under the new governor had last week projected a GDP growth of 7.4 percent for 2019-20–7.2-7.4 percent in first half, and 7.5 percent in the second half.
“Consistent with our index, we expect GDP growth to slow from 7.1 percent year-on-year in the third quarter of 2018 to 6.6 percent in the fourth quarter and further to 6-6.5 percent in the first half of 2019,” Japanese brokerage Nomura said in a report Tuesday.
Citing the fall in the Nomura composite leading index fell to 99.9 in Q1 of 2019 from 100.1 in Q4 of 2018, indicating the business cycle is headed lower, at least into the first half of 2019, the report said.
“Fiscal and monetary policies are turning expansionary but are unlikely to change the near-term trajectory,” the report added.
The monetary and fiscal policies have shifted to easing mode, although it remains cautious on their near-term impact, it said.
“On fiscal policy, while we compute the fiscal impulse of the budget at 0.36 percent of GDP, we foresee implementation challenges ahead of the government’s ‘farm charm’ package,” it said.
On monetary policy, the RBI reaffirmed its focus towards headline inflation and its willingness to support growth, which suggests the February policy cut was not a ‘one and done’, it said.
“With its inflation projection remaining below the 4 percent target through 2019, and our assessment that growth will disappoint the RBI, we expect another rate cut in Q2 (very likely in the April review),” it said.
As the previous divergence between exceptionally low food and elevated core inflation closes, the report does not assess the need for a deeper rate cut cycle. It sees a 20 percent probability to a third rate cut in the third quarter.
Indian economy fundamentals sound, set to reach USD 5 trillion: PM Modi
Seoul: Prime Minister Narendra Modi on Thursday said fundamentals of the Indian economy are sound and it is on the way to becoming a USD 5 trillion economy soon.
Addressing the India Korea Business Symposium here, he said India is now a more open economy and has attracted USD 250 billion foreign direct investment (FDI) in the last four years. He said no other large economy in the world has grown at 7 per cent year after year.
India, he said, has jumped to 77th spot on the World Bank’s ease of doing business ranking on the back of reforms and is determined to break into the top 50 next year.
The role of the government is to provide a support system, Modi said, adding that India has emerged as a land of opportunities.