RBI will cut the key policy rate the repo rate in its 30th October 2012 policy review. The repo rate will be cut by a minimum of 25bps though a 50bps cut is not ruled out. The repo rate at present is at 8% after the last cut of 50bps seen in April 2012. The economic conditions since April have deteriorated, both on the domestic and global front and despite inflation for September 2012 coming in at calendar year highs of 7.81% the case for rate cuts are strong.
Inflation for the month of September 2012 printed at 7.81%, up from 7.55% levels seen in August 2012. Inflation was driven up by the Rs 5 hike is diesel prices by the government in September. However higher fuel prices, while having a temporary effect on inflation will has a more lasting effect on demand. SIAM, the auto industry body, has revised downwards its forecasts for vehicle sales growth for 2012-13 by 3% to 5%. At the upper end of the band, passenger cars, motorcycles and commercial vehicles are expected to grow at 3%, 5% and 7% respectively. Vehicle sales grew at around 15% levels for 2011-12 and the revised forecasts for 2012-13 reflects a sharp slowdown in the industry.
The trade data has come in negative for the first six months of fiscal 2012-13 with exports and imports falling by 6.8% and 4.3% respectively in the April-September 2012 period. The fall in trade indicates weak global and domestic demand and unless there is a pick up in both, the economy will continue to falter. India’s GDP growth is forecast to come off to levels of 5.5% and below by various think tanks from growth levels of 6.5% seen in 2011-12.
The IIP (Index of Industrial production) growth for August 2012 came in at 2.7% year on year against a growth rate of 3.4% seen in August 2011. Manufacturing growth for August 2012 was at 2.9% against a growth rate of 3.9% seen in the previous year. The April – August 2012 IIP growth was at 0.4% against a growth rate of 5.6% seen in the same period last year while manufacturing growth was at 0% against 6% growth for 2011. IIP data reflects a sharp slowdown in industrial growth and despite question marks on the quality of data, the slowdown in visible.
Corporate tax for the April-September 2012 period grew by just 1.6% indicating weak corporate profitability. Gross direct tax collection grew by 5.8% for the April-September 2012. Direct tax growth is reflecting the slowdown in the economy.
Banking indicator of credit growth is also reflecting a weak economy. Credit growth was just 1.3% for the April-September 2012 period while it was 16.4% on a year on year basis as of September 2012. Credit growth for September 2011 was at 20% levels. Credit off take has come off on the back of high interest rates and low business confidence.
RBI will have to balance out growth and inflation expectations. Growth expectations are down but inflation expectations are still sticky despite weak demand factors. RBI had indicated in its September 2012 policy review that it will start giving growth strong consideration given a weakening economy and that growth consideration will reflect in lower policy rates.
Economic stalemate in global economies
Growth is slowing but major economies are adopting austerity measures leading to a further slowdown in growth. Slower growth leads to shortfalls in revenues for many debt ridden countries and that shortfall in revenue is hitting debt reduction targets. There is no way out from this stalemate unless central banks pump in huge amounts of money to bring the economies up from a deep hole. Central bank pumping in money will lead to problems down the line as the surge of liquidity can create many whirlpools.
The IMF downgraded global economic growth from 3.5% to 3.3% for 2012 and from 3.9% to 3.6% from 2013. The IMF has asked governments to adopt growth policies to stop a sharp deterioration in finances but at the same time it is warning them that there has to be long term credible plans to bring down debt. Countries from the US to UK are all carrying heavy government debt and this large debt burden cannot be brought down if economic growth slows. The question is how can governments take up growth and bring down debt at the same time? There is no answer to this at this point of time.
Emerging markets, which were supposed to lead the world economy forward, are stumbling. China is expected to show a GDP growth of 7.4% for the third quarter of 2012, the seventh straight quarter of fall in growth. Brazil is expected to grow at below US growth rates while India’s GDP growth estimates by the IMF at 4.9% is sharply lower than official government estimates of 6.7%. Weakening developed economy growth coupled with slowing emerging market economies will lead to a self fulfilling spiral of growth slowdown.
Global economy is in a stalemate and there is nothing visible that will bring the economy out of the stalemate. In the meanwhile markets will continue to embrace the cheap liquidity provided by central banks in the form of quantative easing and take up prices of assets where there is value to be found. Equity markets are one place where value can be found.