The financial conditions have deteriorated so badly despite the four repo rate cuts and there is a need for a fiscal stimulus, which though may not yield much results due to the fiscal constraints, warns an American brokerage report.
The warnings come amid the gloomy news on the growth front, with GDP expansion sliding to a 5-year-low of 5.8 percent in March and expected to fall further in June quarter. The numbers will be announced next week.
Falling stocks, an overvalued rupee and higher volumes in the US dollar-rupee market are evident of the tightening financial conditions, Bank of America Merrill Lynch said in a report on August 22.
"We believe the economy warrants a significant fiscal stimulus at this stage which does not result in higher borrowing costs," the report said, but was quick to warn that it may yield the desired results due to the fiscal constraints of the government.
"What India needs is a fiscal boost funded by offshore borrowings. But a fiscal stimulus package is unlikely to be a game-changer due to fiscal constraints," it said.
The stimulus package will have to be announced alongside a USD-bond sale so as to not disrupt local currency bonds, it added.
The report said "most" of the tightening of financial conditions are due to the weakness in the equities markets, where the markets have plunged over 10 percent since June, which it attributed to "the lack of any fiscal stimulus in the budget has been one of the big reasons for this sell off."
The brokerage lamented that it was "very strange" to observe government is sticking to fiscal consolidation in FY20 in "when the backdrop is clearly deteriorating".
Tapping into global savings which are in massive search for higher yields can be one of the ways of introducing the fiscal stimulus, it added.
The RBI has reduced its key rates by a cumulative 1.10 percentage points in four successive rate cuts since February and has also changed the direction of policy to be more accommodative.
It can be noted that the government had announced plans for a sovereign bond sale in overseas market, though many are not enthused with the plan.
Those against the move included former RBI governors, economists and other analysts, who point out that the country had not resorted to such a move even in the aftermath of the 1991 crisis. According to some media reports, the government is planning to raise up to $10 billion in October.
Policymakers will also have to somehow inject more liquidity into the troubled non-banking lenders and douse any concerns around them, the report added.
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