Dubai: With the Indian central bank keeping rates intact and the populous pandemic-rattled nation on the road recovery, economists see no change in the current economic stance for the next couple of years.
“We no longer expect any more rate cuts, but markets are too hawkish in expecting modest rate hikes within the next 12-18 months,” viewed Shilan Shah, senior India economist at Capital Economics.
The Reserve Bank of India (RBI) on Friday decided to keep the repo and reverse repo rates unchanged and but committed to keeping policy “accommodative” for the foreseeable future – the central bank revealed in its first policy after the 2021 Budget.
In its February policy review meeting, it also projected gross domestic product (GDP) to grow at a rate of 10.5 per cent for the financial year 2021-22, on the back of recovery in economic activities.
The coronavirus pandemic has stifled economic growth and led to job losses in the several sectors and subsequent demand destruction in the bottom of the pyramid section of the economy, but analysts have been expecting the economy to grow somewhat faster than estimated over the medium term.
On the economic front, India’s PMI readings for January continued to suggest that the nation is rebounding and, Capital Economics views that with fiscal policy finally being loosened significantly, a decent recovery over the coming quarters looks a stronger bet now than it did a few days ago.
Although the economy is forecast to shrink in the fiscal year to March 31 for the first time in more than four decades, the pandemic’s lasting impact on the Indian economy has turned out to be far lower than earlier expected.
The economy recovered faster than expected in the September quarter as a pick-up in manufacturing helped GDP clock a lower contraction of 7.5 per cent and held out hopes for further improvement on better consumer demand.
Banking sector woes
Banking sector concerns remains at the fore even as the economy stages a recovery. India’s $1.86 trillion financial system entered the pandemic already weakened by about $140 billion of bad loans at its banks. Restricted credit supply amid a brittle financial system has also been a key headwind for investment.
So India this week unveiled a plan to set up a bad bank, a place where a struggling financial institution can put assets it wants off its own books to eventually sell or unwind. It is the country’s latest attempt to tackle the mountain of defaulted debt that threatens to cripple its financial system.
“The creation of a “bad bank” in India – for which plans were briefly discussed in the Budget announcement – would help restructure the loans of the most heavily-indebted firms and facilitate a clean-up of the balance sheets of commercial banks,” Shah added.
“But the banking sector is likely to continue struggling in the absence of major capital injections and greater private participation.”
Lesser infections, vaccines
The coronavirus-induced recession in India has been among the most severe in the world amid a stringent lockdown and limited direct fiscal support and the economy is now in a recovery phase that will be further supported by the rollout of vaccines.
Analysts remain of the view that the drop in new COVID-19 cases and the resulting scaling back of containment measures in India has provided a much-needed boost to the economy, and an effective vaccine will further support the recovery in 2021 and 2022.
However, there is also reason for caution among economists who cite that even widespread vaccination won’t restore the economy to full health given the extreme weakness of the banking sector and tepid fiscal support, with output likely to remain below its pre-virus trend for many years.