Given the global economic outlook and challenges on the domestic front, the economy may take some time to start performing as per expectations, so the policy stance is expected to remain accommodative.
The Reserve Bank of India (RBI) policy stance is clearly pro-growth, which is critical to achieve the target of becoming a $5-trillion economy by 2025. Of late, the Indian economy has been going through a challenging phase. GDP growth, although still high in comparison to other major economies, has been falling short of expectations. Recently, the International Monetary Fund (IMF) cut the gross domestic product (GDP) growth forecast to 7 per cent from 7.3 per cent for FY20.
RBI itself has cut the GDP growth target to 6.9 per cent from 7 per cent for FY-20. It expects the first half of FY20 to clock growth of 5.8 per cent to 6.6 per cent and the second half to clock growth of 7.3 per cent to 7.5 per cent. But the risks are somewhat tilted to the downside.
The weakening of demand along with the liquidity crisis in non-banking financial companies (NBFCs) are the two biggest challenges right now, and the central bank has clearly focussed on these two issues. It raised the ceiling for banks' exposure to a single NBFC to 20 per cent of the bank’s Tier-I capital, from 15 per cent earlier. It also relaxed the definition of priority sector lending, so that banks can lend to those NBFCs that further lend to such sectors. RBI has also announced the setting up of a central payments fraud registry to track the systems for frauds. It is expected to come up with detailed guidelines by the end of August to tackle the NBFC crisis. These measures, taken to increase flows to NBFC, is credit-positive and should enhance lending.
The inflation is firmly below the target level of 4 per cent, but there are clear signs of decline in consumption. The private sector is still hesitant on committing capital expenditure. The global economic condition has also been unfavourable for quite some time. The uncertainties of Brexit and the US-China trade war are persistent, along with the political turmoil in the Middle East. In this backdrop, RBI has been taking proactive measures to spur demand growth. This was the fourth consecutive cut in the repo rate, which now stands at 5.4 per cent. The economy is expected to start coming back to its high growth path as the benefits of rate cuts are gradually passed on. And as the balance sheets of banks become cleaner, we believe that they will accelerate the passing on of rate cuts to consumers and businesses.
Given the global economic outlook and the challenges on the domestic front, the economy may take some more time to start performing as per expectations, and therefore the policy stance is expected to remain accommodative. The inflation outlook remains benign, and therefore one can expect more rate cuts in the future.
(The author is Managing Partner & CIO at TIW Private Equity.)Disclaimer: The views and investment tips expressed by the investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decision.