 "Expect a sharper near-term slowdown, says Nomura")
As India Inc is becoming more vocal about the likely pain ahead in the next two-to-three months, the level of caution in the Street is high. For the sixth straight day, the S&P BSE Sensex closed in the red at 26,242 points on Wednesday. A report published by Japanese brokerage Nomura on December 21, 2016, articulated the extent of likely pain ahead for the Indian economy. Sonal Varma, managing director and chief economist at Nomura, emphasised in her report that India may be headed for a sharper near-term slowdown after demonetisation. Nomura made this conclusion after applying five in-house filters, which gauge India’s growth momentum and monetary path.
One of the main observations is that the full impact of demonetisation will be felt in the data of December, not November.
“The impact of demonetisation was felt only in the last three weeks of November,” the report notes, adding that the rural economy has been hurt much more than urban owing to higher cash intensity of transactions. Hence, the slowdown could be sharper in two-wheeler than passenger-vehicle sales.
Also, the services industry comprising trade, real estate, hotels, construction and transport having a higher share in the unorganised sector saw a steeper contraction in activities compared to the manufacturing sector. Likewise, the export volumes have been hit more than the imports as cash-intensive sectors such as gems and jewellery and textiles were hit by demonetisation. With brakes applied on the economy, credit growth, too, is at a multi-decade low of 6.6 per cent due to higher repayments (using old notes) and slower fresh disbursements as banks have been busy with cash exchanges.
While Nomura is among the few foreign brokerages to flag off concerns on economic slowdown, some domestic brokerages, too, are toning down their earnings expectation from India Inc. Analysts at Prabhudas Lilladher expect the December quarter results to be a ‘wash-out’ and the improvement in the March’17 quarter could be slower than expected.
Those at ICICI Securities have already trimmed their FY17 earnings expectations for 59 BSE 100 stocks with most of them representing consumer discretionary, consumer staples, cement and automobile sectors. “Our top-down estimate for Nifty FY17 earnings per share growth is six per cent, down from the pre-demonetisation estimate of 12 per cent,” they add.
Varma cautions that how soon the economy rebounds will depend on how quickly policymakers re-monetise the economy. She also warns that risks are skewed towards further downside surprises and the continued domestic slowdown could tilt the Reserve Bank’s decision in favour of a 25 basis point repo rate cut in February 2017.