The Reserve Bank of India (RBI) has cut the repo rate five times or by 1.35 per cent to 5.15 per cent so far in 2019. This follows an up to 8 per cent reduction in the corporate tax by the government and a withdrawal of the controversial enhanced surcharge on foreign portfolio investors (FPIs). Besides, the government has notified decisions on liberalising foreign direct investment (FDI) regulations on single brand retail, coal mining, contract manufacturing and digital media.
But, investors in the stock market have given the cold shoulder to these developments after a short-lived euphoria. The benchmark Sensex that had surged over 3000 points in two days after the corporate tax cut announcement has pared most of its gains. It fell by 433 points on Friday after the announcement of the repo rate cut. The sentiment turned negative largely due to the revision in the economic projection for the financial year 2019/20. The Monetary Policy Committee (MPC) of the apex bank has cut the GDP growth forecast to 6.1 per cent from 6.9 per cent earlier.
"Besides, the rate cut did not enthuse the market because it was building in a higher reduction than 25 basis points," said Naveen Kulkarni, Head of Research, Reliance Securities.
Among sectors, the situation has worsened in the real estate. The country's stalled residential projects now amount to $63 billion, according to Anarock Property Consultants. Meanwhile, low consumer sentiment continues in the automobile sector - Maruti Suzuki India reported a 24.4 per cent decline in sales in September, Hyundai Motor India (HMIL) 8.1 per cent and Tata Motors 48.02 per cent.
What should the government do?
Shekhar Bajaj, chairman and managing director of Bajaj Electricals says that public investments are witnessing a delay and the government funds are not being released on time. "If the government pumps funds into the projects, it will partly revive the chain of economic activities. Tax reductions for the individual as well as the goods should be the next step to put liquidity in the hands of buyers, which in turn can revive the demand," he said.
Seshagiri Rao, Joint Managing Director & Group CFO, JSW Steel had earlier pointed out that the government should boost public spending for the revival of the economy. "A good monsoon will revive economic activities in the rural market, while the bank recapitalisation will enhance liquidity," he said, adding that delays in reviewing projects and releasing funds are the major blockades resulting into slowdown in infrastructure projects.
"We are in an undeclared financial emergency. People don't want to buy cars, washing machines and houses. They are in a saving mode as they fear job losses. Some of them expect that prices will crash to make purchases and investments cheaper," said a senior official from a conglomerate.
"The government is addressing the issues on the supply side, but is doing nothing for reviving the demand," he emphasised.
Another executive from the same conglomerate said that the government should increase the fund allocation to the rural employment guarantee scheme at least by three times. "It will help in reviving the semi-urban and rural markets. They should enhance the public spending, besides infusing liquidity in social sectors such as health and education," he added.
Despite the RBI slashing interest rates multiple times, the weighted average lending rate on fresh loans by commercial banks has not reduced. "The RBI has cut the rates by 135 basis points, but the lending rate has gone down by only 29 bps at least until the last rate cut in August," pointed out Sanjay Dutt, MD & CEO, Tata Realty & Infrastructure.
Arun Thukral, MD & CEO, Axis Securities agrees that the transmission of rate cuts to the end consumer has not happened fully. "The transmission will greatly help in boosting overall demand and push up the consumption and investment environment in the economy," he said.
Data showed that only 50 per cent of private sector banks reduced their MCLR until July post three consecutive rate cuts, says Arun Singh, Chief Economist Dun & Bradstreet India.
The banks are reluctant to give up margins as they fear a downturn, which can also affect their business. Secondly, banks have become extra cautious in project financing after non-performing assets swelled in their kitties. "The bankers are now cautious and suspicious. They fear that their deals can be questioned in future," Seshagiri Rao said. He added that bank employees should not be put to task for bonafide decisions taken in the interest of doing business.
George Alexander Muthoot, managing director of Muthoot Finance said, "We look forward to a recovery in the consumption with banks eventually passing on the benefits to both corporates and consumers."
Niranjan Hiranandani, managing director of Hiranandani Group suggests that the current economic scenario makes it the right time for the RBI to announce its one-time rollover scheme similar to the one rolled out during the Lehman crisis in 2009 under the global slowdown scenario, which shall act as remedy to the ailing companies.
Arun Singh of Dun & Bradstreet said, "The steep downward revision in the growth forecast and the cut in the repo rate by the RBI post a series of stimulus measures announced by the government highlights the fact that concerns of slowdown has intensified... Taking a stock of the various ongoing and emerging challenges, globally and domestically, it is highly likely that the slowdown that will last longer than expected earlier."