Reacting to last week’s second round of fiscal and monetary measures, economists at banks and rating agencies expect no dramatic changes in the economic growth scenario and believe there would be another round of rate cuts soon.
Robert PRIOR-WANDESFORDE, senior asian economist, HSBC, said he is now looking for another 50bp off all three rates (repo, reverse repo and CRR), in the next couple of months.
Explaining the bottlenecks in arresting the falling growth despite stimulus packages he said, “These include the reluctance of the private sector to borrow for capex purposes, even at lower interest rates, as profit expectations are scaled back, an unwillingness of banks and non-bank financial institutions (both in India and abroad) to lend and the severe weakness of export demand.”
In a nutshell, what the authorities have done so far via their various measures are necessary to generate a strong recovery but may not be sufficient. Confidence is the key here and that in turn will depend partly on global developments. Also, nobody should be under any illusion that the measures will work immediately. There is really nothing the country can do to avoid a further period of economic pain and job losses over the next few months, he cautioned.
According to Abheek Barua, chief economist, HDFC Bank, the impact of the stimulus package is unlikely to be dramatic, at least in the near term. The fact is that the economy is going through one of the worst phases of demand compression in recent history. “The lending rates may not come down significantly for a number of reasons. Banks are growing increasingly careful about asset quality and are prepared to accept slower credit growth in the coming months to ensure this. Thus, despite the decline in policy rates, it might not in banks’ strategic interest to drop rates simply to chase custom,” said
Sherman Chan, an economist at Moody’s Economy.com. He said the expansionary measures have given business and household confidence an immediate boost, which may help to stop a sharp economic deterioration for now. More stimulatory measures are expected in the coming months. For instance, RBI is likely to trim the repo rate to 4.5% by the end of the March quarter to support the credit market. That said, the overall growth momentum for 2009 will still be weaker than the past few years. Moody’s Economy.com forecasts India’s economy to grow around 6% this calendar year.
Standard Chartered Bank expects further measures from the authorities to combat the slowdown.
In fact, the deputy chief of the planning commission has clearly stated that more monetary measures will be taken.
“We expect interest rates to drop further in the coming months. Although further fiscal measures in the current year have been ruled out, we expect a central government fiscal deficit of 4.2% of GDP for FY10. Given all these measures, growth should start looking more positive as we approach H2-FY10. But near-term pain remains inevitable, in our view,: said the bank in its economic note.