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Declining consumer spending is seen as a major impediment
Declining consumer spending is seen as a major impediment

Lack of pvt sector spending a hurdle for macro revival

Nearly 30% of the respondents expect a marginal deterioration in the prospects of the banking sector

Lack of private sector investment is likely to pose the biggest hurdle to economic recovery for the country hobbled by covid and the subsequent lockdown, a Reserve Bank of India survey found. Declining consumer spending and confidence were seen as the next two major impediments to recovery.

The RBI’s systemic risk survey of 31 respondents was conducted in October-November to capture the perceptions of experts and market participants about the major risks faced by the financial system.

Other likely hindrances to a robust economic recovery are supply chain disruptions, financial impact on operations and/or liquidity and capital, workforce reduction/employee stress, lack of information for decision-making, impact on tax and trade issues and lower productivity, the survey found.

Companies have been struggling with supply chain disruptions following the nationwide lockdown, resulting in a complete earnings washout in the June quarter. However, aggressive cost reduction measures reflected in lower employee costs, travel expenses and ads and promotions boosted margins in the September quarter. The earnings revival is expected to continue in the December quarter, mostly led by festive sales.

Respondents rated risks from global and domestic growth, domestic inflation, fiscal deficit, corporate vulnerabilities, infrastructure development and equity price volatility to remain ‘high’. Institutional risks such as asset quality deterioration, additional capital requirements, level of credit growth and cyber risk were rated as ‘high’. Global risks, macroeconomic risks and financial market risks were perceived as ‘medium’.

This signals a shift in perception among participants who in the April survey had rated risks to economic growth and fiscal deficit as very high.

Nearly 30% of the respondents expect a marginal deterioration in the prospects of the banking sector over the next year on account of the negative impact on earnings, lower net interest margins, elevated asset quality concerns and a possible increase in provisioning needs. While respondents expecting deterioration exceeded those expressing optimism on the state of banking, the overall responses indicate a better outlook as compared with the previous round.

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