RBI’s prognosis on state of Indian Economy

The coming decade will mark India’s ascent on the world stagestates RBI’s Bulletin on State of the Economy

While the Indian and global economy is putting out mixed signals in its direction in the short run, the longer-term picture paints an optimistic outlook. With 2023 well underway, the long-awaited signs that inflation pressures are waning is indeed good news. Inflation has been a bane for an emerging market economy like India, and it is being eclipsed by the long-awaited push in global growth.

The RBI in its latest State of the Economy bulletin reflects the scenario quite succinctly pointing out that this phase will improve the prospects of the Indian corporates.

With international and domestic input cost pressures showing signs
of easing and with corporate sales growth still buoyant, it is expected that earnings will improve in subsequent quarters and contribute to a speeding up
in the momentum of growth in the Indian economy. Furthermore, corporate balance sheets also reflected a turn-up in investments in fixed assets, heralding the modest beginning of an upturn in the capex cycle,” noted RBI’s State of the Economy report.

The peak of inflation

No doubt, India cannot yet afford to throw caution to the wind, as inflation needs to be monitored. The RBI noted that while ‘global inflation may be slightly down, it is certainly not out. If anything, it has broadened and become stubborn, especially at its core.’ However, as global inflation is showing signs of peaking, as producer price index and consumer price index (CPI) is cooling in various economies, the brighter side is that interest rate hikes will moderate.

Expectations of a slower pace of monetary tightening have gained ground, lifted global stock and bond prices while restraining the US dollar’s rally. Against this backdrop, our model-based nowcast using all available GDP releases indicates that global GDP growth gathered some momentum in Q3:2022 after sequential contractions in preceding quarters,” the report affirmed.

Banks on revival mode

A key factor that distinguishes a strong economy is a sound financial and credit market. With bank credit growth having surpassed deposit growth since February, major lenders have increased deposit rates, the RBI cited, pointing out that banks had come up with various ways to attract retail funds. “Banks have come up with various special deposit schemes for different tenors with comparably higher rates than the regular schemes to attract more retail deposits,” the article said.

The median term deposit rates on fresh retail deposits (card rates) of SCBs increased by 67 bps between May and November 2022. The extent of pass-through to deposit rates has been higher for longer tenor maturities, with the highest being for 1-3 years tenors,” it said.

Good credit demand

On the other hand, if there was any expectation that higher domestic rates would impact the credit market, the current scenario is putting that to rest. Credit growth has been robust the last year and continues its sanguine path.

“Scheduled commercial banks’ credit has registered double-digit growth since April 2022,” stated the report. “It stood at 17.2% on November 18, 2022, against 7.0 percent a year ago,” the report continued. That is indeed commendable and indicates that there is a huge credit demand uptick and that a bigger revival in corporate capital expenditures is on the anvil.

The uptick in corporate bond issuance is a comfort as well suggesting that the worst of the rate hikes is behind. “Fund raising through corporate bond issuances jumped to Rs 76,563 crore during November 2022 from Rs 36,751 crore in October 2022. Softening rates on corporate bond papers bode well for issuances as the demand for funds is expected to stay robust as growth gathers momentum,” confirmed the report.

With the rising demand for credit, and the relatively modest deposit growth of banks, the funding gap is being met through other sources too. Fund mobilisation through the CD market has also seen a sharp upswing. CD issuances have been robust at Rs 3.96 lakh crore during the year so far (up to December 2), higher than Rs 0.78 lakh crore in the year ago period.

No doubt, banks are increasing the drive for deposits. “With the ongoing growth in credit demand surpassing SCBs’ deposit growth since February 2022, major banks have hiked their deposit rates. Banks have come up with various special deposit schemes for different tenors with comparably higher rates than the regular schemes to attract more retail deposits,” pointed out RBI’s report.

That said, SCBs have been transmitting rate hikes. In response to the policy rate hike of 190 bps, SCBs have increased their 1-year median marginal cost of funds-based lending rate (MCLR) by 95 bps during the period May to November 2022. The magnitude of transmission to weighted average lending rates (WALR) on fresh and outstanding rupee loans has further improved to 117 bps and 63 bps, respectively, during May-October 2022,” said the report.

Well-placed liquidity

No doubt, as the Indian economy evolves to a high growth economy, the pressure on fund demand will only grow. Despite this, the liquidity conditions remain strong despite the hike of 35 basis points in December and the series of rate hikes the past year. However, the higher government spending and the return of foreign portfolio investor (FPI) inflows eased liquidity conditions in the banking system in the second half of November through December 11, 2022

Looking ahead, liquidity conditions are likely to draw comfort from higher government spending, moderation in currency leakage and renewed portfolio flows,”

Notably, the RBI has been watchful of the evolving liquidity conditions and stands ready to inject liquidity, if required, to meet the productive requirements of the economy, points out the report.

Market boosters

The Indian economy today stands at an inflection point of higher growth. The equity markets also reflect this optimism as markets touched a string of new highs during November. The Indian markets had touched a new high in October 2021 aided by the gradual reopening of the world economy. Interestingly, the current market peak has come with lower volatility.

“A closer comparison of the two peaks shows that the current peak is distinguished by lower expected volatility and relatively modest valuation multiples,” notes the RBI report. With input cost pressures decreasing and a continuous strong sales growth coupled with the tailwinds of capital expenditures, the good news is that equity valuations don’t appear much stretched.

India’s decade

Besides, India is cementing its place in the global economy over the last decade. India accounts for 3.6 percent of G20 GDP while its share in real (PPP) terms is much higher at 8.2 per cent. In 2023, India is projected to be among the fastest growing economies within G20.

Hence, India’s growth rates would have significant implications for the global economy, and underscores the reality that India is becoming an economic force to reckon with. This is also reflected in the conclusion of the report: “There is a growing sense that the coming decade will mark India’s ascent on to the world stage.”

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