EXPECTATIONS FROM CREDIT POLICY: AUGUST 2017 August 1, 2017 I Economics The third bi-monthly monetary policy review for this fiscal year is to be announced by the RBI on 2nd August 2017. It will be sixth monetary policy review by Dr. Urjit Patel, RBI s governor and the Monetary policy committee. CARE expects status quo in the policy stance. Contact: Madan Sabnavis Chief Economist madan.sabnavis@careratings.com 91-22-67543489 Manisha Sachdeva Associate Economist manisha.sachdeva@careratings.com 91-22-67543675 This policy review is in the backdrop of declining inflation, moderation in economic growth, decline in bank credit and bank deposits growth, contraction in money supply, fall in GSecs yields and appreciation of rupee vis-à-vis dollar. Monetary Backdrop 1. Credit, Deposit and Money supply growth for the financial year so far Table 1: Growth in Bank deposits, credit and money supply for the period Apr-July 17 Mradul Mishra (Media Contact) mradul.mishra@careratings.com 91-22-67543515 % Deposit Credit Money Supply 2016-17* 3.1 0.2 3.4 2017-18* -1.0-1.7 0.3 Source: Reserve Bank of India ; *Apr-July Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report The growth in bank deposits has contracted by (-) 1% during the period Apr-July 2017 compared with the growth of 3% in the corresponding period last year. Credit growth in the economy contracted by (-) 1.7% during the period Apr-July 2017 compared with a miniscule growth of 0.2% in the corresponding period last year. The low growth can be ascribed to lack of pick-up in investments, high NPAs coming in the way of banks interest in lending and increased capital requirements besides migration to debt market. Money supply in the economy grew marginally by 0.3% during the period Apr- July 2017 compared with the growth of 3.4% in the corresponding period last year. The growth in money supply continues to be lower even after remonetization. 2. Currency in Circulation The notes circulated in the system currently stands at Rs 15,074 bn in the month of Jun 17, an increase of around 29% since Nov 16(the month when demonetization took place). This number has been increasing over the months as RBI has infused more cash in the system.
Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Rs billion Chart 1: Currency in circulation since demonetization 20,000 17,540 16,000 12,000 11642 9186 9629 11068 13102 14070 14628 15074 8,000 4,000 0 Source: CMIE 3. Specific Measures taken to absorb excess liquidity RBI had conducted two Open market purchases in the month of July amounting to Rs 200 billion to absorb the excess liquidity in the market. 4. Excess money with the banking system There is still excess liquidity in the system that can be illustrated through increase in reverse repo flows since demonetization. The o/s reverse stood at Rs 265,645 crores as on July 28, 2017. Economic Backdrop 1. GDP growth The GDP growth declined from 8% in 2015-16 to 7.1% in 2016-17 as per provisional estimates on account of fall in mining and quarrying, construction and services. In addition to this, the numbers for 2015-16 has been revised as a result of use of new Index of Industrial Production (IIP) and Wholesale Price Index (WPI) with base 2011-12 for the compilation of GDP. 2. Inflation and International commodity prices Table 2: CPI and WPI inflation (%) % CPI WPI May'17 2.1 2.1 June'17 1.5 0.9 Source: MOSPI 2
8-Jun-17 26-Jun-17 1 2 2 USD CPI inflation reached a historic low of 1.5% in the month of June 17 compared with 2.1% recorded in the previous month. The decline was mainly due to fall in food prices viz fall in the prices of cereals, egg, pulses, sugar, milk, spices and vegetables and due to favorable base effect. This might become a very strong reason for RBI to initiate a rate cut. However, it is to be noted that inflation in non-food components still remain in the range of 5% with inflation in housing recording a growth of 4.70% and with implementation of 7 th pay commission, inflation in housing Index might further increase. The 7 th pay awards are also expected to have an indirect impact on inflation with increase in private expenditure in the economy. GST impact will be known from July onwards. WPI inflation for the month of June 17 declined considerably to 0.9% ( the lowest in 11 months) compared with 2.1% registered in May 17.Deflation in food and non-food articles was the primary reason for inflation in WPI to record such low levels. In addition to this, inflation and fuel and power also declined owning to reduction in international oil prices. However, it is to be noted that oil prices have increased by around 10% from the last monetary policy as a result of decline in U.S. crude inventories and recent decision of Saudi Arabia- the world s largest oil exporter to cut back its exports. Chart 2: Movement in International oil prices 55.00 50.00 45.00 40.00 35.00 30.00 WTI Brent Source: Bloomberg Prices of global commodities have however eased in the month of June 17 compared with the previous month with 3. Movement in 10-years-GSecs The 10- year GSecs yield has declined from 6.53% to 6.46% during the period 8 June 17-28 July 17. Government securities have witnessed an increase in demand from both domestic and foreign investors where domestic demand has largely been driven by banks that are flushed with surplus liquidity post demonetization. There has also been a surge in foreign inflows into the debt segment on the back of improving sentiments about the domestic economy. A total of $6,753 mn has come into the debt segment in the months of June and July 17 as against the inflow of mere $98 bn in the corresponding period last year. 3
8-Jun-17 9-Jun-17 13-Jun-17 15-Jun-17 19-Jun-17 21-Jun-17 23-Jun-17 27-Jun-17 29-Jun-17 3-Jul-17 4-Jul-17 6-Jul-17 10-Jul-17 12-Jul-17 14-Jul-17 1 18-Jul-17 20-Jul-17 24-Jul-17 2 26-Jul-17 2 28-Jul-17 Rs/$ 8-Jun-17 9-Jun-17 13-Jun-17 15-Jun-17 19-Jun-17 21-Jun-17 23-Jun-17 27-Jun-17 29-Jun-17 3-Jul-17 4-Jul-17 6-Jul-17 10-Jul-17 12-Jul-17 14-Jul-17 1 18-Jul-17 20-Jul-17 24-Jul-17 2 26-Jul-17 2 28-Jul-17 % Chart 3: 10 year GSec yield movement for the period 8 June 17-1 Aug 17 6.60 6.55 6.53 6.50 6.45 6.46 6.40 6.35 6.30 Source: FIMMDA 4. Movement in Exchange rates The rupee has been strengthening against benchmark US dollar in the recent months on account of continued foreign inflows into the Indian markets and improved investor sentiments on back of rollout of GST. The exchange rate has moved from Rs 64.21/$ to Rs 64.15/$ during 8 June 17-28 July 17. However, rupee did depreciate in the second week of June on account of interest rate hike by U.S. Federal Reserve. But rupee gained the momentum afterwards to reach at the current level of Rs 64.15 per dollar. Chart 4: Rs/$ movement for the period 8 June 17-1 Aug 17 65.00 64.80 64.60 64.21 64.40 64.20 64.00 64.15 63.80 63.60 Source: RBI 4
Factors favoring a status quo Impact on inflation is still unclear on account of 7th pay commission allowances and GST. The housing inflation has a potential to move upwards following the awards given under 7th pay commission. o There is also a possibility of higher inflation in services in the coming months, given the average tax rate for most of the services has increased to 18% in the GST regime from 15%, earlier. Farm loan waivers have the potential to push inflation upwards in the coming months. Core inflation still remains on the higher end having a growth rate close to 4.5%. Oil prices have edged up by around 10% since the last monetary policy. Factors favoring a rate cut CPI inflation print is at a historic low. Moderation in global commodity prices. So far, surplus rainfall is observed across the country which will lead to good kharif harvest. What do we expect? We expect RBI to maintain status quo in its interest rates in the upcoming RBI policy view as inflation potential is still uncertain due to implementation of GST, farm loan waivers and 7 th pay commission allowances. We expect RBI to initiate a rate cut in the month of October 17, once the picture becomes clearer and upside risks to inflation subside. CORPORATE OFFICE: CARE Ratings Limited (Formerly known as Credit Analysis & Research Ltd) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai - 400 022; CIN: L67190MH1993PLC071691 Tel: +91-22-6754 3456 I Fax: +91-22-6754 3457 E-mail: care@careratings.com I Website: www.careratings.com Follow us on /company/care Ratings /company/care Ratings 5