Goldman Sachs sees rate hike soon as India bank rescue to spur growth
Mumbai: Goldman Sachs Group Inc. just got more bullish—and hawkish—on India.
While the investment bank has for months been an outlier predicting monetary tightening in Asia’s No. 3 economy, it now sees the rate increases coming earlier than investors expect. That’s because the government’s plan to inject a record Rs2.1 trillion ($32 billion) of fresh capital into its struggling lenders over the next two years will spur loans and growth in gross domestic product, boosting stocks and the rupee.
“A Rs1.05 trillion infusion into state-run banks over the next 12 months would lower the drag on bank credit growth by up to 10 percentage points and boost GDP growth by up to 5 percentage points,” Goldman economists led by Jonathan Sequeira wrote in a note. “The measures are likely bearish for short-term rates, as they make the RBI more likely to hike rates sooner than market expectations.”
Goldman forecasts that the Reserve Bank of India will raise its key rate three times by the end of 2018, “an outcome that is not fully priced in by the market,” where swaps indicate little change. The RBI is due to review policy 5-6 December, and a split within its rate-setting panel is already widening as members disagree sharply over the trajectory for inflation.
Macquarie Group estimates that state-run lenders account for more than 70% of India’s banking system and they hold almost 90% of all bad loans in the country, according to data from Credit Suisse Group AG.
Even after providing for the stressed assets, banks will have around Rs1 trillion available for lending, said Soumya Kanti Ghosh, chief economic adviser with State Bank of India, the country’s largest lender. That could unleash at least Rs3.3 trillion which could rise to a Rs10 trillion additional infusion in the economy, he said.
The recapitalization plan “addresses an important supply-side issue and improves the outlook for private capex recovery,” said Upasana Chachra, India economist at Macquarie. She retained her 7.2% growth estimate for the year through March 2019 but said that may rise if investments—some 30% of GDP—improve quicker than expected.
The risk is that if rates are left unchanged or raised, it will dampen demand for loans, according to economists such as Bloomberg Intelligence’s Abhishek Gupta. Then there are others who say that demand isn’t a problem; it’s just that banks are unwilling to lend to certain companies such as small and medium-sized businesses.
These businesses employ more than 90% of India’s workforce. However, just 4% have access to bank loans while the rest depend on informal money lenders or family funding, said Praveen Khandelwal, a top official at the Confederation of All India Traders, an umbrella organization representing India’s 60 million small and medium-sized traders. CAIT says sales over the recent festival season slumped 40% from a year earlier, leading to the worst Diwali in a decade.
“Given the slowdown, and the problems traders face with getting loans from banks, this announcement was needed,” Khandelwal said, referring to the bank recap plan. “But more needs to be done.” Bloomberg
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