Global investment bankers have warned that India’s growth could slip sharply if the Reserve Bank’s liquidity tightening measures are not rolled back by October-March.
A weak growth trend lasting for 4-5 quarters would increase the risk of a vicious cycle building, whereby the economy becomes vulnerable and the risk increases of GDP growth sliding to 3.5-4 per cent, according to a report by Morgan Stanley. “The recent monetary tightening and uncertain global capital market environment could mean growth stays low for at least two more quarters.”
It said the viciousness could intensify with a 4-5 quarter growth slowdown resulting in a sharp rise in non-performing assets leading to risk aversion in the domestic banking sector; increase in challenges related to fiscal deficit management with weaker revenues and reduced confidence of foreign investors, exacerbating the external funding risk.
According to a report by Bank of America Merrill Lynch, incoming data should “reinforce our view that FY’14 growth will slip to 4.8 per cent if RBI tightening is not rolled back by October-March busy season. “Our base case is that it will be: Bimal Jalan’s (former RBI Governor) January 1998 tightening lasted 2 months. We expect growth to end FY’14 at 5.3 per cent and FY’15 at 6.3 per cent,” it said.
“In fact, RBI tightening will only sustain deposit growth below loan demand. Infrastructure industries production has also slowed down to 0.1 per cent from 2.3 per cent last month. The HSBC PMI is down to 50.1 from 54.7 in December,” BofAML said.
Further, Morgan Stanley said longer duration of higher rates for borrowers and slower GDP growth can lead to sharp rise in NPAs in the banking system. It said currently 75 per cent of the banking system (SOE banks) is running on stretched balance sheets, with a problem of undercapitalisation and weak asset quality.
Moreover, net impaired loans at some of the SOE banks are now almost 100 per cent of equity.
Apart from the stress on account of a prolonged growth slowdown and monetary tightening, the depreciation of the rupee will also be an additional stress point for banks and corporates. Moreover, as per the RBI, almost 60-65 per cent of this external debt of is un-hedged.