New Delhi: The Monetary Policy Committee of the Reserve Bank of India is expected to announce yet another interest rate cut of 25 basis points Wednesday, hoping to give a fresh stimulus to boost slowing growth.
But economists say if the fallout of the rate cuts earlier this year are any indication, it’s difficult to be optimistic.
Three consecutive 25 basis-point rate cuts by the RBI since February have failed to spur consumption demand in the economy. Nothing reflects this better than the lacklustre credit offtake to retail borrowers for the purchase of consumer durables and automobiles, and the less-than-optimistic sales numbers of firms.
Downward spiral
Bank credit growth in the consumer durables segment has been contracting for 11 consecutive months, according to RBI data, while vehicle loans have been growing at a marginal 5-6 per cent for the last few months.
The contraction in demand for bank lending is over and above the drastic reduction in lending by non-banking finance companies battling a liquidity squeeze since September last year, which has adversely impacted sales on non-essential items such as consumer durables and cars.
Quarterly results of firms declared over the past few weeks reflect the bleak economic sentiments and the reduction in discretionary spending by Indians.
Automobile manufacturer Maruti Suzuki reported a 36 per cent decline in sales in July, a trend reflected across automobile manufacturers, as fall in rural incomes and liquidity squeeze impacted demand.
FMCG major Hindustan Unilever posted a seven-quarter-low sales number in the first quarter of 2019-20 on account of subdued rural growth.
The overall demand slowdown has also impacted credit demand from industry. Bank lending data shows though overall credit offtake increased 11 per cent as of end-June, credit to industry grew by only 6 per cent.
Within the industry sub-group, credit to micro and small industries grew at only 0.6 per cent, while credit growth to medium-sized firms was at 2 per cent.
Also read: RBI faces calls to do more than just one rate cut this week
Biggest challenge
Spurring consumer demand to revive economic growth will be the biggest challenge for the RBI ahead of the monetary policy announcement on 7 August. The government has also finally acknowledged the need to kickstart the economy, with Finance Minister Nirmala Sitharaman meeting banks Monday, followed by a meeting with small and medium enterprises, real estate developers and home-buyers, and automobile sector representatives later this week, as it looks to take measures to increase consumption demand in the economy.
India’s economy slowed to a five-year low of 5.8 per cent in the last quarter of 2018-19 led by a slowdown in consumption and investment. Growth for the full year also contracted for the second consecutive year to 6.8 per cent in 2018-19, from 7.2 per cent in 2017-18 and 8.2 per cent in 2016-17.
The sharp slowdown in the automobile sector was also a talking point in the minister’s meeting with bankers. State Bank of India Chairman Rajnish Kumar Monday pointed out that NBFCs were the major vehicle financiers and the bank is bringing out products to improve vehicle financing.
Monsoon an important factor
The distribution and pace of the monsoon will also be an important factor in improving rural demand, said Shubhada Rao, chief economist at Yes Bank.
“Looking ahead, if the pace of rainfall activity sustains through much of August, there is a likelihood that for the season as a whole, there could be only a minor miss in the southwest monsoon outturn vis-à-vis the IMD’s forecast of a 4 per cent deficiency,” Rao said in a note dated 1 August.
“Nevertheless, any monsoon shortfall is likely to weigh on an already slowing consumption demand, by impacting agri production and farmer incomes adversely.”
Also read: RBI rate cuts now reaching consumers in two-three months, not six, says Shaktikanta Das