By Indranil Sen Gupta & Aastha Gudwani
We continue to expect the RBI MPC to cut policy rates by 25 bps on December 5, and by 15 bps in February. Although nominal MCLR has slipped by 40 bps (50 bps in FY20, 40 bps in FY21 BofAMLe), on RBI easing, it has risen 120 bps in real terms as core WPI inflation has fallen to 0.7% from 3.1% last year on weak demand.
A saving grace is that MCLR on retail/SME loans would immediately fall as they are linked to ‘external’ benchmarks like the RBI repo rate. After all, time is running out for lending rate cuts, with the ongoing ‘busy’ industrial season set to intensify in the March quarter. Note, we use core WPI inflation to calculate ex post real lending rates as it captures corporate pricing power, while RBI targets CPI as it reflects the cost of living.
Growth fell more than expected, to 4.3% in the September quarter (4.7% BofAMLe, 4.5% consensus), even below June’s 4.9%, with the 2018 liquidity crunch still hurting. Sequentially, too, growth fell by 0.9% versus median quarter-on-quarter of -0.1%. Our BofAML India Activity Indicator points to the slowdown continuing.
In response, we cut our FY20 growth forecast by a further 40 bps to 5.1%. While we expect a shallow recovery to 5.2% in the December quarter on base effects, the bottom has got deeper and longer. September slowdown was led by 0.5% industry contraction. Core industries’ production fell 5.8% in October atop -5.1% in September. Barring public expenditure, services growth moderated. Investment continues to slip to 27.3% of GDP from 29.2% last year (see graphic).
We do not set much store by the fact that November inflation will climb to 5.2% from October’s 4.6%; November-February should similarly go up to 4.7% from 3.3% in April-September on the onion price spike/base effects (see graphic). Onion prices have shot up to 159% in October from 119% last month.
A saving grace is that core inflation ex gold, silver et al slid to 3.3% in October from 3.7% in September (see graphic). Fundamental drivers of inflation remain in check. A substantial output gap restrains corporate pricing power. Second, liquidity remains tight: excess M3 demand is still 1%. Third, agflation should be in check as full rivers augur well for coming winter rabi sowing, although the start is delayed by late rains. Fourth, ‘imported’ inflation is muted, with recent RBI FX intervention ($33.1 bn FYTD) limiting depreciation (1.1% FYTD) as well as soft weak world growth holding global commodity prices.
In our view, growth is collapsing because real lending rates are rising.
Edited excerpts from BofAML’s 4.3% growth vs 5.2% CPI: 25bps RBI rate cut on Dec 5 (December 2, 2019)
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Source: Financial Express