The Reserve Bank of India is expected to cut interest rates at its third quarter review of monetary policy on Tuesday after it said there has been a ?significant decline? in business optimism despite comfortable liquidity with commercial banks, which parked nearly Rs 2,00,000 crore of excess funds with government securities than a year ago. ?The macroeconomic and monetary developments?third quarter review 2008-09?, released on Monday by the bank, shows that of the 19 parameters of business indicators, most are expected to worsen. The ?industrial outlook survey? is conducted by RBI every quarter among manufacturing companies in the private sector to judge how they expect their business will shape up in the three-month period.
The RBI review of the economy has pointed out that the median growth rate for GDP as judged by professional forecasters for this fiscal is 6.8%, down from the September 2008 estimate of 7.7%. This is lower than the ?most conservative? 7.1% GDP growth projected by the Prime Minister?s Economic Advisory Council on Friday.
Accordingly the professional forecasters? survey has also pegged growth for industry at 4.9% for 2008-09, sharply lower than the earlier projection of 7%. The only signs of optimism are the dip in raw material costs as global commodity prices ease up. A majority of the companies present in the survey said they expect their selling prices to dip. The business expectations indices have slipped by 5.9% for January-March 2009 quarter, worse than the 2.6% for the October-December 2008 quarter over the corresponding quarter a year before.
According to the review, the downside risks to the growth prospects of the economy have increased. ?The balance of risks on growth outlook is tilted towards downside?, it states. RBI has also said unlike the advanced economies where the downturn spread from the financial sector to the real sector, ?in India the slowdown in real sector is affecting the financial sector?, that could again affect the former. This means the recession could be deeper and longer than expected earlier.
RBI analysis indicates that for the Indian economy, monetary policy response would have to remain the dominant line of defence in the coming months since the options for tax cuts are not there till a new government is sworn in by May.
The break-up of sectoral bank credit deployment shows what FE has been stating repeatedly. Though non-food credit has expanded by 23.9% as on January 2, 2009 year-on-year, credit to small enterprises has fallen off drastically. Commercial banks have instead parked a full 5% more of their investments as statutory liquidity ratio papers. SLR investments, prime grade government securities, are now 28.9% of the total investment by banks instead of the RBI set floor of 24%. This means the bank have parked an excess of Rs 1,95,112 crore in government papers instead of lending to the commercial sector.
The other worrying trend is that credit from private and foreign banks have come down sharply. Credit by public sector banks grew by 28.6% as on January 2, 2009, up from 19.8% last year, whereas credit growth of private banks fell to 11.8% as on January 2, 2009 from 24.2% a year ago. Lending growth of foreign banks too halved to 16.9% from 30.7% during the period.
Most bank credit has flown to the petroleum and fertiliser industries, credit to them grew by 101.8% year-on-year by December 2008, as compared with a growth of 11.8% in the corresponding period of the previous year. Excluding credit to these sectors, the growth of non-food credit has been flat at 22.9%, almost the same as last year at 22.1%. As expected, credit for housing and consumer durables has come down sharply, along with that for education loans. The dip has been more pronounced in the last quarter.