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Reserve Bank of India Repo Rate Forecast Report December 2020

The RBI is expected to hold the interest rate at the 2–4 December meeting, according to a unanimous vote by 11 economists.

Meet our panel

NameOrganisationJob title
Prithviraj SrinivasAxiscapital, wholly-owned subsidiary of Axis BankExecutive director and economist
Indranil PanIDFC FIRST BankChief economist
Rucha RanadiveCARE Ratings LtdEconomist
Radhika RaoDBSEconomist
Anuj PuriAnarock Property Consultants Private LimitedChairman
Ankita PathakEdelweiss FinancialEconomist
Radhika PiplaniYES BankEconomist
Mridul MehndirattaThe Wealth DialoguesIndependent researcher and writer
Amol AgrawalAhmedabad UniversityAssistant professor
Gauri SharmaRoha Asset ManagerEconomist
Aditi NayarICRA LimitedPrincipal economist

Key findings

  • The Reserve Bank of India (RBI) expected to hold the repo rate on 2–4 December
  • GDP expected to be positive by the first half of 2021
  • Economists say the government is being too conservative with stimulus
  • Joe Biden presidency expected to be somewhat positive for India

Forecast for the 2–4 December RBI meeting

The RBI is expected to hold the interest rate on 2–4 December, according to a unanimous forecast from Finder’s panel of 11 economists.

The majority of the panel say high core and consumer price inflation is the main driver for a rate hold and some noted that economic recovery has been quicker than anticipated.

Economist and executive director at Axiscapital, Prithviraj Srinivas, put it this way:

“Growth recovery is swifter than expected and inflation remains uncomfortably high still, RBI will choose to wait given that it has shown conviction in inflation easing in coming months.”

Roha Asset Managers economist, Gauri Sharma, agrees the MPC will hold in the face of high inflation.

“India’s wholesale inflation has risen to an eight-month high of 1.48%. If we consider the consumer price inflation, the same was at a six-month high of 7.61% in October. Inflation has stayed above the threshold of 6% and owing to the same, MPC is not likely to cut interest rates.”

However, Sharma noted that while the economy is showing signs of improvement, it’s not yet clear whether this is due to genuine or pent-up demand.

“… If it’s pent-up demand, this consumption-led demand will not be long-lasting and demand will have to be induced through many instruments, including interest rates. Owing to these two reasons, I think the Central Bank will hold the interest rates until clarity emerges.”

IDFC First Bank chief economist, Indranil Pan, said the RBI will be mindful that with inflation high but bank deposit rates coming down, real interest rates for savers are actually negative.

“… More importantly, inflation is more broad-based now compared to what was earlier thought. With inflation high but with bank deposit rates coming down sharply (due to excess liquidity pushed in by the RBI), real interest rates for savers are negative. RBI will also be mindful of this,” he said.

CARE Ratings economist Dr Rucha Ranadive said the economic growth is encouraging, but suggested the MPC might also want to assess how well the Atmanirbhar package stimulates the economy before adjusting the rate.

“In terms of economic growth, the latest projections of the RBI for Q3 and Q4 based on high-frequency indicators are encouraging, indicative of the likelihood of robust economic recovery from the pandemic. MPC members might also want to assess how well the Atma Nirbhar Package 3.0 announced by the GoI fares in kickstarting the economic activities,” she said.

What’s the outlook on the Indian economy?

Just over a quarter of economists (or 3 of 11) agree with the government that the economic outlook is positive across all sectors. However, over a third (36%) don’t agree and the remaining 36% say they’re unsure.

Edelweiss Financial Services lead economist, Ankita Pathak, said that while economic recovery is positive, the outlook is subdued once pent-up demand and the festive season wanes.

“… ‘trade, hotels and transportation’ are still losing 30–40% of their output and certain other categories have seen a permanent dent from the already subdued pre-COVID output. Clearly, not everything is as hunky-dory,” she said.

Assistant professor at Ahmedabad University, Amol Agrawal, said he was unsure if he agrees with the government’s outlook, but he agrees with Pathak that the rate of recovery will vary from sector to sector.

“The recovery will be more like K-shaped for some time with some sectors growing and others not so much. If infections remain low then laggard sectors will also grow over time. A broad-based recovery will only be there when vaccines begin in India,” he said.

Meanwhile, YES Bank economist, Radhika Piplani, is one of three economists who agree with the government’s outlook. She says that high-frequency indicators suggest better economic recovery than market estimates had earlier predicted.

Likewise, Srinivas says that pent-up demand has coincided with festive season uptick to boost monthly revenue figures across several sectors.

“If active COVID case count continues to ease, demand normalisation will continue to aid data uptick.”

When will GDP turn positive?

With reports from the RBI’s “nowcast” that India has entered a technical recession, we also asked our panel when they expect India’s GDP to return positive. Nearly three-quarters of the panel (73%) expect GDP will be positive by the first half of 2021. 18% of which expect GDP to be positive as soon as the end of 2020. Meanwhile, just over a quarter expect GDP to be positive by the latter half of 2021.

What will a Joe Biden presidency mean for India?

The majority of our panellists (64%) say a Biden presidency will have some positive impact on the Indian economy, with the remaining 36% neutral.

Gauri Sharma thinks a Biden presidency will have some positive impact on the Indian economy, citing reformation on immigration policies and the easing of trading barriers as primary reasons.

“I think the Biden government will be focused towards reforming immigration policies in [the] USA which may positively impact India.

“Moreover, in my opinion, the focus of the Biden government will also be on easing trade barriers by reducing duties, tariffs and other restraints. This may have a direct and an indirect positive impact on India,” Sharma said.

The Wealth Dialogues independent researcher Mridul Mehndiratta agrees, stating that a Biden presidency is opportune to reverse any momentum that cost India billions in terms of export losses.

“India-US bilateral relations are ‘too-big-to-fail’ and have always gathered momentum under every presidency. However, Biden is expected to reverse the built of a wave of economic nationalism which had caused India export losses worth billions given the denial of privileges under [the] Generalised System of Preferences (GSP) which India deserved as a developing nation. This can help settle trade disputes between the two countr[ies] which couldn’t be resolved under [the] Trump Administration,” she said.

Meanwhile, Indranil Pan remains neutral, claiming that a Biden presidency could be good for trade, but with the state of the world it may all just cancel out.

“[A] Biden presidency could be a relative positive so far as trade relations are concerned. However, given the overall spread and re-spiking of the virus, any immediate improvement in trade across the world could remain restrictive,” he said.

Is the government too conservative with fiscal packages?

The panel unanimously agrees – the government is being too conservative with its fiscal packages. Almost all the panellists (91%) believe the government is being too conservative for economic reasons, while one panellist, Indranil Pan, split from the pack saying that economic reasons may not be the driving force.

“The government could be worried about the large borrowing programme and the likely impact of this on the debt servicing capacity if the nominal GDP does not pick up significantly in the next year,” he said.

Should the government announce more stimulus?

Despite the government recently announcing a new $35 billion stimulus package, Agrawal, Sharma and Mehndiratta still think further stimulus would be needed in the event of another wave of infections.

“The recovery looks stronger so a stimulus might not be needed. However, the infections are again on a rise and if the economy slips then another stimulus might be announced,” said Agrawal.

Sharma calls for a package totalling 7% of GDP.

“I think the size of another stimulus package is dependent on the possibility of a second wave at this point. Clarity regarding both will only appear next year but there is a need for another stimulus.

“Ideally, the government should announce a package totalling 7% of the GDP. In effect, the government has till now announced only around 2% of the GDP as stimulus.”

Sharma says the next package should at a minimum aim to compensate for at least half the difference in the consolidated capex of states in the current versus previous year.

“To give you perspective, 12 large states, accounting for three-fourths of overall gross domestic product, may have to cut back capital expenditure by up to $36 billion in the fiscal year through March, ICRA Ltd. estimates,” she said.

Where are the gaps in stimulus?

We also asked our panellists if there are any gaps in the stimulus packages announced since the COVID-19 pandemic began. Sharma says the government has covered a wide variety of sectors, but she says there’s still more to do to encourage state capital expenditure.

“The GST shortfall of Rs. 3 lac crores has been attempted to overcome by the centre borrowing Rs. 1.83 lac crores from the market, on behalf of the states. It is a step in the right direction. I think the centre can help the states further by focusing on increasing infrastructure and development exercise in each state and UT, with a focus on the states which are the largest multipliers.”

Meanwhile, Agrawal claims entertainment and hospitality industries have been left out of the stimulus equation.

“… some sectors like cinema/entertainment, hotels etc have been seriously impacted. The government needs to properly assess the impact on more affected sectors and stimulus should be targeted towards them,” he said.

Mehndiratta thinks not enough is being done for agriculture and MSMEs. She notes more needs to be done to boost private consumption.

“The stimulus package so far focuses on supply-side measures mainly.”

Is there anything the government could do it isn’t already doing?

When asked to posit what the government could do, our panellists pointed to relief efforts, greater transparency and social security as key areas to keep an eye on.

Gauri Sharma thinks the government should look to aid industries hardest hit by the pandemic.

“I believe that going forward, the government will have to usher in reliefs and reforms for some struggling sectors such as auto and hospitality, in order to help them tide over this period of uncertainty.”

However, Mridul Mehndiratta thinks that while the government is looking to prop up industry, it should be sure not to forget about social security.

“Given the pay cuts and job losses this year, the government needs to put in place adequate social security measures and aggressively implement them to cushion the most vulnerable economic sections against the impact. Amidst the capital expenditure boost and stimulus for industry, it’s imperative that social security systems for the informal and unorganised sector be adequately strengthened too.”

Amol Agrawal believes the government should be more transparent in what the future holds for the country:

“The government has not released any outlook and future policy for Indian economy. The government should release a report/white paper which takes into account all the macros and the probable impact on fiscal numbers.”

Image: Getty

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