BackTight monetary policy, bad loans preventing upturn in investments: CLSA
CLSA's Christopher Wood adds that high levels of non-performing loans another reason behind delayed pick-up in the investment cycle
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Relatively tight monetary policy is one of the reasons that are preventing the investment cycle pick-up, said Christopher Wood, managing director and chief strategist of brokerage CLSA, in the latest edition of his newsletter Greed & Fear.
Wood added that the legacy issue of high levels of non-performing loans in the Indian banking sector and the inability to adequately capitalize state-owned banks is another reason behind delayed pick-up in the investment cycle.
“This is why monetary easing alone is probably not a sufficient condition for a new investment cycle in India. It is also why hopes for an upturn in investment are, unfortunately, for now, unhealthily dependent on increased government spending," Wood said.
The Reserve Bank of India (RBI) will meet for its next policy review on 4 August. While most analysts expect the RBI to keep rates steady, some expect the central bank to indicate that better-than-expected monsoon and lower commodity prices may create room for further easing in the months ahead. RBI has cut rates by 75 basis points since the start of 2015.
CLSA has been among the most bullish on India ever since the National Democratic Alliance (NDA) government came to power. Wood said that CLSA remains bullish on India and China as there is considerable room in both economies to easy monetary policy. Both economies also stand to benefit from lower commodity prices.
“The room to ease monetary policy in both countries, combined with the positive impact of lower commodity prices for both economies, are the main reasons Greed & fear still remains overweight both on India and China...," said the newsletter.
Writing about the problem of bad loans in the Indian banking sector, Wood said the problem is “eminently fixable".
“... the size of the problem is not that large in US dollar terms assuming stressed loans are around 15% of the banking system which is probably a reasonably conservative estimate. Thus, total bank credit rose by 9.4% y-o-y (year-on-year) to ₹ 66.7 trillion or $1.05 trillion on 10 July, implying an estimated $158 billion of stressed loans."
Wood added, however, that fixing the issue quickly may not be easy, given India’s democratic set-up.
“Still the issue is how quickly this problem is fixed since democratic India is not China, in terms of the ability of even a Modi-led government to act decisively." he said.
According to the RBI’s latest financial stability report, stressed loans (which includes non-performing assets and restructured loans) rose to 11.1% of total advances in March from 10.7% in September.
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