Macroeconomic indicators show early signs of growth that can be capitalised with appropriate policy action. The annualised IIP is down to 2.6%, while capacity utilisation in the manufacturing sector is showing a shade higher at 74.8% in Q2, up from 73.8% in Q1.
Prompted by low inflation sentiments and evolving macroeconomic configuration, RBI in its sixth bimonthly monetary policy had cut repo rate by 25bps, bringing it down to 6.25%. A quick reversal of interest rate cycle in just 18 months comes at a time when the economy needs pump priming. A more important and widely expected move is the unanimous change in its monetary policy stance from ‘calibrated tightening’ to ‘neutral’ to bring about flexibility in interest rate movement. It paves way for a crucial change of mindset of market players that can accelerate growth. It can also trigger a positive outlook with further rate cuts in the near term.
Despite continued volatility in external sector and upside risk to crude oil prices, inflation is expected to be within the comfort level of RBI’s glide path of 4% with a band of +/-2%. Though food prices may see an uptick in the coming season, inflation may not touch threatening levels. Retail inflation having gone down to 2.8% in March, the RBI outlook is now recast to a range of 3.2-3.4% in the first half of FY20 and 3.9% in its third quarter with risks evenly balanced.
Macroeconomic indicators show early signs of growth that can be capitalised with appropriate policy action. The annualised IIP is down to 2.6%, while capacity utilisation in the manufacturing sector is showing a shade higher at 74.8% in Q2, up from 73.8% in Q1. The GVA during the year is expected to be 7% in FY19 compared to 6.9% in FY18. Productivity in agriculture can be placid where shortfall in ‘rabi’ sowing is to be offset by extended periods of cold weather boosting wheat yield. The RBI Industrial Outlook Survey for Q3 indicates weakening demand conditions in manufacturing, while the Business Expectations Index points towards improvement in Q4. Similarly, the uptick in manufacturing PMI for January 2019 is stacked with increased output supported with new orders. Investment activity is on a recovering edge mainly with the surge in public spending on infrastructure.
Trade deficit from April-November has been struggling, but net FDI inflows during the period inched up compared to corresponding period of the previous year. Foreign portfolio inflows, too, rebounded in November-December. The combined impact helped foreign exchange reserves to cross the psychological mark of $400 billion. Based on such readings, RBI has projected GDP growth in FY20 to be at 7.4%. It should range between 7.2-7.4% in H1 and 7.5% in Q3.
When RBI policy review is seen together with the Interim Budget leaving more cash with the farm sector in Q4 and the revival in demand for credit, banks can tap business opportunities to post a better turnaround. The year-on-year growth of deposits up to January 18, 2019, is 9.7% as against 4.6% during the corresponding period of the previous year.
With three state-owned banks out of the Prompt Corrective Action and the recent spate of capital infusion, banks can accelerate flow of credit to trade and industry to support growth. The increase in the collateral-free loan to the farm sector from `1 lakh to `1.6 lakh can benefit small and marginal farmers. More than passing on the benefit of lower interest rates, accelerating bank credit will be significant.
The relaxation in the end-use of ECBs will enable repayment of rupee-term loans of target company by resolution applicants in the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code. It can hasten stressed asset resolution to recycle such funds to stimulate credit. The onus is now with banks to deliver benefits of RBI policy move to stimulate growth.
(Director, National Institute of Banking Studies & Corporate Management, Noida. Views are personal.)