RBI governor Shaktikanta Das said on Friday that India’s GDP is seen contracting by 9.5% in FY21 following the economic disruptions from Covid but hoped that the economy will stage a mild recovery of 0.5% by Q4
India Inc. has pinned its hopes on steps announced by the Reserve Bank of India (RBI) to support liquidity, revive exports, boost credit flow and ease of doing business to give the Indian economy the breathing room it needs to chart a recovery path, at a time when the central bank has had to hold lending rates to control inflation.
RBI governor Shaktikanta Das said on Friday that India’s gross domestic product (GDP) is seen contracting by 9.5% in FY21 following the economic disruptions from covid-19 but hoped that the economy will stage a mild recovery of 0.5% by Q4. “Manufacturing firms expect capacity utilisation to recover in Q3:2020-21 and activity to gain some traction from Q3 onwards," Das added.
“Both private investment and exports are likely to be subdued, especially as external demand is still anaemic. For 2020-21, therefore, real GDP is expected to decline 9.5%, with risks tilted to the downside. If, however, the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible."
Chandrajit Banerjee, director general, Confederation of Indian Industry, said, “...the additional measures announced by the RBI to support growth in the form of liquidity support, reviving exports, credit support, and improving ease of doing business, are expected to give the much-needed impetus to drive the three-speed recovery which the central bank expects."
Inflation targeting was bound to be at the centre of today’s announcements by the RBI’s monetary policy committee, especially when a stubbornly high headline consumer price inflation rate, averaging 6.6% over the past 10 months, will likely be the biggest challenge for the committee to take on at the moment. “With a rate cut unlikely, the focus will be on commentary from the RBI on the country’s growth trajectory," a markets expert told Mint. “Meanwhile, it should consider how better the 250 basis points cut so far (from last year) can be transmitted to borrowers."
The financial vulnerability of Indian industry is precarious at the moment. After six months of coping with low consumer demand and an uncertain operating environment, repayment risks on debt run high. Some estimates suggest that over 43% of entities in the highly vulnerable segment of the mid and emerging corporates, belonging to the sectors linked to discretionary spending and who already have limited liquidity buffers and significant leverage, will approach their lenders to restructure debt.
Dr. Joseph Thomas, head of research - Emkay Wealth Management, said, “The probability of RBI cutting rates in the near future remains quite low in view of the higher inflationary pressures. RBI views the current spike in prices a "transient hump", as price level may moderate in Q4. But, with a huge government borrowing program ahead, the RBI will continue with the liquidity support… In our view, it is not the rate cuts but the liquidity provision that matters today, when the market rates on short term bank and corporate papers have touched low single digits."
With real estate demand gradually seeing some green shoots of revival, especially in the wake of reduced stamp duty charges--in Maharashtra--and developers discounts and freebies, reduced repo rates would have given an added boost just before the upcoming festive season, a representative for the real estate sector said. "On a positive note, RBI’s move to rationalise risk weightage on home loans and linking housing loans risks only to loan-to-value is a welcome move," Anuj Puri, chairman, Anarock Property Consultants, said. “This announcement thus will definitely encourage banks to lend more to individual homebuyers without feeling the stress on their balance sheets. In the current challenging times, banks have been reluctant to lend owing to risks amidst the pandemic while buyers have remained financially stressed."