As global and domestic growth prospects look increasingly worrisome, the stage is ripe for a larger RBI rate cut
Global growth prospects now look increasingly weaker across China, Europe and the US. Trade growth, a key artery in the global economy, has also slowed markedly, to around 4% in 2018 from 5.25% in 2017. Crude markets have remained broadly supported, but purely by supply cuts led by producer group OPEC and by aggressive sanctions by the US against Iran and Venezuela.
A consensus is yet to emerge when the US could turn into a slowdown mode following the yield curve inversion last week. The average duration of lead months of inverted yield curve and the US economy slipping into recession is 14 months and average duration of recession is 12 months. By this logic, the US might plunge into recession by the end of 2019 or early 2020! Interestingly, a plot of Fed Fund Futures and Market clearly indicates US markets are pricing in a rate cut in second half of 2019.
Rural demand weak at home
Back home, rural demand continues to look increasingly weak. Additionally, latest global forecasts indicate that El Nino weather phenomenon is gaining strength. Procurement data published by NAFED suggests procurement agencies could not procure even half of the quantity sanctioned at MSP, thereby the impact on food prices will continue to remain low. The cash transfer will not impact inflation. Even if we assume food price increases by as much as @10%, the CPI inflation will still be decisively below 4% for most of FY20.
Urban demand worrying, too
Urban demand is also worrying. Even February sales for the auto industry declined to a new low as weak consumer demand continues into the sixth straight month. A deceleration in global trade growth is also impacting export outlook through the trade channel.
Investment scenario, as can be referred from orders inflows, has declined in Q3FY19 by 20%. Non-banking financial companies (NBFCs) with higher exposure to SMEs/ loan against shares and developer loans are likely to see pain in FY20 also. Credit growth is not broad based and is in selective areas only. Capex-led growth from listed companies will remain muted and working capital will remain key to credit growth.
We thus expect at least a 25 basis points (bps) rate cut in April policy (cumulative 50-75 bps over next two to three policies) though we believe the stage is ripe for a larger rate cut. If the rate cut is of 25 bps only, then Reserve Bank of India (RBI) could indicate more cuts through a possible shift in stance/ policy statement. RBI should also take a holistic approach with liquidity framework as call rates are liquidity agnostic.