RBI's monetary policy spells more trouble for India Inc's earnings

In the absence of near-term government stimulus, markets may remain range-bound until Budget

Odds were in favour of a 25-basis-point reduction in repo rate. But when the Reserve Bank of India (RBI) decided against it on Thursday, the stock market seemed to have taken it in its stride: Without losing much ground, the BSE Sensex closed almost flat at 40,779. 

According to Pankaj Pandey, head of ICICI Securities, an increase in inflation as spelt out in the RBI policy had somewhat been priced in. What gives some hope, explains Prabhudas Lilladher Chief Portfolio Manager Ajay Bodke, is “the monetary policy committee’s willingness to reduce rates in future if conditions warrant a reduction”. 

However, the problem for India Inc lies in the fine print of the policy. A key negative, many point out, is the deterioration in capacity utilisation from 74 per cent to 68 per cent in the past year. Critical pointers like export demand and local manufacturing also remain uninspiring. That the services sector activities, rural consumption and demand for automobiles have stayed muted also compounds the issue. These justify the RBI’s decision, in line with many global rating agencies’, to slash India’s gross domestic product (GDP) growth estimates — to 4.9-5.5 per cent for second half of FY20 from 6.6-7.2 per cent earlier. In other words, this implies companies must brace for a prolonged slowdown that might take a year or more to reverse, and hence lower earnings expectations. Already, India Inc's earnings growth rate, excluding tax benefits, was in single digit in the September quarter.

 For equities, the next positive trigger might well have got pushed to the Union Budget. Until then, says Bodke, markets may remain choppy, or range-bound at best. “Any consumption-boosting announcement in the Budget — a relaxation in personal income tax rates, capital gains tax or dividend distribution tax, for instance — will give a leg up to sentiment and probably revive consumer spend in the country.” 

But if banks, meanwhile, start transmitting cuts in the repo rate at a faster rate than present, the narrative will change. Sample this: While the RBI has lowered its repo rate by a total of 135 bps since February 2019, banks’ lending rate has declined by only 49 bps during this period. Banks often cite steep small savings rates as an impediment to deposit rate cuts. Small savings rates at present hover between 6.9 per cent and 8.6 per cent across categories — that is 100-120 bps premium to bank deposit rates. While banks have had some success in reducing deposit rates (47 bps during this period) the reduction has been effected in a phased manner.

Pandey affirms that banks have the potential to anchor growth, and stabilising credit costs should enable bolder decisions on the growth trajectory. However, what will also be tested is the appetite of consumers for discretionary and home loans, if money is to be made available at a cheaper rate. The trends that emerged in September-quarter results indicate that banks have also turned cautious on retail loans, especially unsecured ones, which are a key component in pushing demand for discretionary goods. Bankers say festive-season demand was encouraging, but it remains unclear whether that lifted sentiment sufficiently and would support growth till budgetary relief comes in.