Today RBI is slated to release the bimonthly monetary policy statement. Till date, it has dropped rates four consecutive times totaling 110 bps starting with 25 bps in Feb’19.
Question is whether it will continue on the same line and reduce rate by another 25-35 bps or play safe and maintain status quo to:
- Get more time to understand impact of rate cuts on the economy
- Wait for Oct and Nov inflation/ CPI rates to be just sure that inflation is still in comfortable zone
The current problem that economy is facing today is lack of growth. Analysis of GDP has shown (refer my earlier article on this) that major fault lies in dampened private consumption while from industry (GVA factor) perspective, manufacturing looks to be in deep trouble. RBI is expecting that the rate cut will encourage private consumers to save less and spend more while also, making credit available at cheaper rate for industries. If both these works perfectly, then we should see the economy in track.
We will try and seek an answer to whether the rate cuts have yielded necessary result and that could be used as a measure of transmission effectiveness of our monetary policy changes.
- Spend/ Consumption
As a surrogate measure, we will consider spent comprising cards (debit and credit) usage at POS, usage of debit card in ATMs and mobile spent. The sum total of the same we will call as Total Retail Spent. Good news is that the growth in spent in July 2019 (latest we have from RBI) has accelerated to 6% compared to 4% in July 2018. This uptake just in nick of festive season start is a good omen. Hope it holds. More importantly, the individual components; debit card usage at POS, credit usages at POS, mobile spent have clocked better growth in July-19 respectively at 2% (1%), 5% (3%), 7% (5%). Figures in bracket are for same month last year.
- Savings/ Deposits
The picture here gets more exciting. The growth in demand deposits and the term deposits (month on month) in Aug-2019 has decelerated compared to Aug-2018. That is good news for an economy looking at consumption led growth. Possibly the rate cuts have made deposits less attractive, which is exactly what RBI is expecting.
- Credit Availability
The overall gross bank credit in August decelerated to 9.9% compared to 12.2% (Year on Year variation). Ideally the rate cuts should have translated to more credit offtake.
Let us look at two major aspects, credit to industry and the personal loans. The first reflect the credit availability to drive supply while the 2nd one will drive demand growth.
From industry perspective, credit growth is reflected below. From a Y-o-Y perspective, it is better but compared to July it has dropped. Actually, it has been in a downward trend from April-19 itself.
A more worrying scenario comes up from the industry split. The credit offtake in Micro/ MSME sector has contracted on a YoY basis. If we focus on the last few months, there has been a significant skew towards large industries. For a country, where lot of manufacturing/ ancillary industries are Micro/ MSME, the contraction in credit growth is really worrisome and can be an indicator of two factor playing together. First, banks, under pressure of NPA, are more comfortable to lend to large players. Secondly, Micro/ MSME industries are seeing drying up of demand due to contagion effect from larger industries and reduced demands and hence their cash flow drying up, ability to pare debt reduced and hence, waiting on further investments. That would imply lower credit offtake from this sector players.
From personal loan perspective, the good news comes from Consumer Durable loans which has shown significant increase as reflected in August data. Among other components, Housing loan credit growth looks steady at 16.6% compared to 15.2% of previous year, same month. Vehicle loan continues its downslide with August figure at 3.7%, compared to 4.9% in July 2019. Also, with respect to 12.7% in Aug 2018, it is significantly lesser.
We started with the question whether the sequential rate cuts from RBI has yielded satisfactory impact on the economy and hence, how good has been the transmission.
The data on savings/ consumptions seems to be a bright spot indicating a small but positive movement. It is also reflected in the credit offtake for consumer durables. On the flip side, the credit offtake by industries is low despite lowered cost of funds.
Considering that the current economic situation is more driven by demand constraint, an increase in consumption will slowly push demand and hence, the impact on the industries will come with a lag. If the momentum continues, we may slowly see the industry investing further.
The good part for RBI is that inflation seems to be under control. The August month only showed small increase to 3.21%. With monsoons quite good, price of F&B is expected to remain under control. This will give headroom to RBI to look at a further reduction in rates. Since the transmission seems to be happening, albeit at a low pace, the justification for further rate cut remains strong and not doing it may halt the little progress we have seen till date.
Hence, we expect RBI to reduce the rate by 20-25 bps at most, bringing the repo rate to 5.15% from current 5.4%. It will be interesting to watch out for the growth commentary from RBI. I guess, they will be cautiously optimistic but will keep the growth figures at a conservative level only.
Source: RBI for raw data. Featured image from livemint, which had sourced it from Reuters.
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