Early results for the second quarter of 2012-13 indicate that the drop in sales growth and earnings witnessed in the previous quarters may finally be bottoming out. Added to this is rebound in car sales numbers, reported by manufacturers in the beginning of this month.
During the first quarter, an RBI analysis of corporate performance based on a common sample of 2,308 non-government non-financial companies, indicated that the year-on-year sales growth had decelerated sequentially over the last three quarters, but remained positive after adjusting for inflation. Earnings, however, contracted sharply due to higher increase in expenditure relative to sales, indicating a decline in pricing power. Things are certainly looking up this quarter.
The progressive improvement comes amid a clear trend pointing to subdued credit flows to key sectors. Since April this year, after the RBI signaled a reversal of its monetary stance by way of a lending rate cut that was followed up by CRR (cash reserve ratio) cuts in September and the one announced late last month, most commercial banks have lowered their lending rates. Despite this, the flow of funds into the country’s commercial sector continues to be stifled. According to the central bank, the estimated flow of financial resources from banks, non-banks and external sources to the country’s commercial sector was pegged around Rs 4,70,000 crore in 2012-13 (up to October 5, 2012), lower than the Rs 5,00,000 crore during the corresponding period of last year.
Not that the rate cuts did not have the desired effect. During the first half of the current fiscal (2012-13), the modal deposit rates of scheduled commercial banks declined by 13 basis points (one basis point is a hundredth of a percentage point) across all maturities and the modal base rate of banks also declined by 25 bps.
While the CRR cuts have helped pre-empt the tightening liquidity situation, the area of concern continues to be the sluggish credit flows to consuming sectors, a trend being attributed in part to the lack of investment appetite among companies. Apart from the decline in the flow of resources from domestic banks, the flow from external sources too declined on account of lower external commercial borrowings and foreign direct investment into India.
Anil is a Senior Editor based in New Delhi