RBI's move to tighten liquidity may worsen financial conditions: Analysts
Economists say the policy reversal could damage the already fragile consumer and investment sentiment, which will dampen sentiment further.
By ET Bureau | Updated:
NEW DELHI: Independent economists and brokerages rushed in with gross domestic product (GDP) growth downgrades after the Reserve Bank of India shocked markets with Monday night measures to tighten liquidity, effectively raising short term interest rates. The government put up a brave face and said economy will grow 6 per cent or more in the current financial year.
“There is a risk that today's measures could backfire,” warned Nomura economist Sonal Varma in a note. “India's growth is already very weak and tighter domestic liquidity will worsen the financial conditions for corporates and banks, hurting asset quality and the growth outlook.”
Even before the measures, India’s growth outlook had taken a knock over the weekend after the data released on Friday showed industrial production fell 1.6 per cent in May and exports contracted 4.6 per cent in June. Bank of America Merrill Lynch its projection for 2013-14 to 5.5 per cent from 5.8 per cent earlier. Morgan Stanley said it sees a 75-100 basis points downside risk to its 6 per cent forecast for the year.
Finance minister P Chidambaram said in Jaipur the Reserve Bank of India measures are for the short-term and should not be concluded as precursor or prelude to hard policy rates, pegging growth rate in the current financial year at 6 per cent. Chidambaram said the Reserve Bank of India (RBI) measures “will in no way affect our commitment to growth. We must increase credit delivery and must stimulate growth”.
Not many economists were ready to buy the optimistic view on growth, “It seems very difficult from where we are today. 6 per cent seems aspirational today,” Crisil chief economist DK Joshi said. However, they admitted that the measures could be short term and monetary easing could resume in the new calendar. “By using a tool other than the policy rate, RBI has signalled that this is intended to be a temporary measure to address a specific problem; not the beginning of a monetary policy tightening cycle,” Roland Randall of ANZ said. However, ANZ does not see any chance of a reduction in rates in the current calendar.
“There is a risk that today's measures could backfire,” warned Nomura economist Sonal Varma in a note. “India's growth is already very weak and tighter domestic liquidity will worsen the financial conditions for corporates and banks, hurting asset quality and the growth outlook.”
Even before the measures, India’s growth outlook had taken a knock over the weekend after the data released on Friday showed industrial production fell 1.6 per cent in May and exports contracted 4.6 per cent in June. Bank of America Merrill Lynch its projection for 2013-14 to 5.5 per cent from 5.8 per cent earlier. Morgan Stanley said it sees a 75-100 basis points downside risk to its 6 per cent forecast for the year.
Finance minister P Chidambaram said in Jaipur the Reserve Bank of India measures are for the short-term and should not be concluded as precursor or prelude to hard policy rates, pegging growth rate in the current financial year at 6 per cent. Chidambaram said the Reserve Bank of India (RBI) measures “will in no way affect our commitment to growth. We must increase credit delivery and must stimulate growth”.
Not many economists were ready to buy the optimistic view on growth, “It seems very difficult from where we are today. 6 per cent seems aspirational today,” Crisil chief economist DK Joshi said. However, they admitted that the measures could be short term and monetary easing could resume in the new calendar. “By using a tool other than the policy rate, RBI has signalled that this is intended to be a temporary measure to address a specific problem; not the beginning of a monetary policy tightening cycle,” Roland Randall of ANZ said. However, ANZ does not see any chance of a reduction in rates in the current calendar.
“In September, a repo rate increase by RBI cannot be ruled out either”, said Madan Sabnavis, chief economist, CARE Ratings. Economists say the policy reversal could damage the already fragile consumer and investment sentiment, which will dampen sentiment further. “Measures could undermine sentiments; the authorities need to tread delicately so that exchange rate stabilization does not come at the cost of growth” warned Taimur Baig and Kaushik Das of Deutsche Bank said in a note to clients.
Separately, Asian Development Bank also pared India’s growth forecast for 2013 citing slow pace of reforms. “In India...slow progress in pushing through the reforms needed to ease business bottlenecks means growth is likely to be 5.8 per cent this year, slower than the previously forecast 6 per cent,” the regional development bank said in its 'Asian Development Outlook Supplement'.
Finance minister P Chidambaram promised more reforms that would include a rail tariff authority and spectrum auction and hoped the parliament would approve the real estate regulator and land acquisition bills.
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