The Indian Economy is going through a rough period with multiple uncertainties. The key growth driver of the economy, the fast-growing consumer economy, is showing weakness in demand, especially on the rural side. Investment demand is yet to pick up and election uncertainty is postponing investments. Bad loan issues for banks continue while NBFCs are facing a liquidity freeze. hurting credit to consumers.
Trade data is showing weak export growth on global economic uncertainty brought about by US-China trade wars. The rural economy is showing weakness on low prices of farm produce, CPI inflation is below RBI target of 4% while core CPI inflation has come off from highs of 6% to levels of 4.5% over the last one year.
Liquidity is in structural deficit despite RBI adding Rs 3 trillion of primary liquidity through OMOs in the last fiscal year. Cost of credit has risen despite RBI rate cuts with credit spreads rising over the last six months post IL&FS default. The 10 year government bond spread over the repo rate has risen sharply from lows seen a couple of year ago. Rate cuts are not filtering through and real interest rates have risen if measured by spread between CPI and repo rate.
The 4th quarter fy 19 results and guidance from companies such as Maruti and HUL indicate a consumption slowdown and guidance given by these companies is muted. Demand slowdown is hurting corporate earnings and this could worsen any investment demand. Banks both Public and Private Sector Banks are showing rising provisions for bad loans on new RBI norms and fresh slippages and this is likely to continue to for the next couple of quarters. Weakening corporate earnings is adding to concerns on bad loans and credit growth will be affected.
The real estate sector is going through a tough phase with lack of demand and lack of credit and this is leading to more NPA worries for banks from this sector.
The government is fiscally constrained to spend given record borrowings for fiscal 2019-20 and with bank deposits growing at below double digit levels, the absorption of supply is in doubt.
In all this, RBI maintained a neutral policy stance in its April policy despite lowering the repo rate to 6%. RBI has to now consider changing its stance and adopt a more aggressive approach to rates and cut the rates sharply in June to prevent the economy from going down further.
On the global front, US economic data is strong and with Fed adopting a wait and watch approach to rate hikes, the economy can stay strong. Data from Eurozone came in marginally better and ECB is maintaining record low rate policy and adding liquidity through LTROs. (Long Term Refinance Operations). China saw weakness in data and is fiscally and monetarily pump priming the economy in the face of trade wars while Japan data came in better and BOJ is ultra loose on policy. Inflation remains low across the globe.
Table 2: Global Economic Data