Forget V-shaped recovery! RBI is telling you pain in economy is acute

Friday’s commentary from the Reserve Bank of India put cold water on hopes of a fast recovery for the Indian economy from the Covid disruption. While the surprise 40 basis points repo rate cut and extension of the moratorium on loan repayment came as welcome relief measures, these steps and the accompanying assessment of the health of the economy cast a pall of gloom.

Analysts and economists said these measures clearly reflect the apex bank is sensing some big trouble for the economy going forward. Governor Shaktikanta Das hinted as much in his remarks, when he said India's gross domestic product (GDP) growth will be in negative territory in 2020-21, though he did not put a number to it.

Multiple rating agencies and outfits have already cut India's growth rate for the current financial year to near zero. The worst projection so far has come from Goldman Sachs, which has projected India’s GDP growth to fall to -3.6 per cent in 2020 with further downside risks, revising its earlier forecast of -2.5 per cent.

Global rating agency Moody's has slashed India's GDP growth rate at zero for this financial year. The UN has cut it to 1.2 per cent while ICRA has projected a 5% contraction.

NK Singh, Chairman of the 15th Finance Commission, on Thursday said is the Covid disruption could limit India's GDP growth between -6 per cent and 1 per cent in the financial year 2020-21.

“The governor’s speech underpinned the low prospects of a V-shaped recovery. RBI’s commentary indicated that the stress in the economy on both demand and supply sides is likely to continue,” said Abhimanyu Sofat, Head of Research, IIFL Securities.

He said the government should provide a subvention on existing loans or bear some of the cost of the haircut on existing loans to provide more confidence to banks to lend to lower-rated entities or individuals.

Vinod Nair, Head of Research at Geojit Financial Services, said the surprise rate cut shows RBI is sensing big issues in the future. “The extension of the moratorium on term loans is also signalling that the economy is not going to be normal. This gives us a very bleak outlook.”

Das said while the global economy is heading into recession, the inflation outlook for India remains “highly uncertain”.

“Domestic economic activity has been impacted severely by the two-month lockdown," he said. He also pointed out that the top six industrialised states, which account for 60 per cent of India's industrial output, are largely in the red and orange zones, which are yet to see resumption of economic activity.

Das said the high-frequency indicators like demand for electricity and petroleum productions indicated a collapse in demand.

“The rate cut can have only limited impact in the short term, but it will be helpful in reviving growth over the longer term,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities.

He said the decision to extend the moratorium period for loans is a significant negative for private banks, both in the medium and long term. “The impact on the banking sector will be negative,” he said.