The RBI Governor Raghuram Rajan recently announced a cut in interest rates. The repo rate cut was of 25 basis points (0.25%) which brought down interest rates to 7.25% in the bi-monthly monetary policy review. This is the third time this year that the central bank has taken the decision to cut interest rates.
This rate is expected to have an immediate impact on three key industries that is the automobile, BFSI and real estate with the interest rates for borrowing lowering. However, on the overall level it is expected to push other key sectors such as retail and FMCG as companies in these sectors can go ahead with expansion plans. Earlier we had seen the key sectors such as automobile, BFSI, FMCG and retail that needed for the growth of the economy and their impact on the growth expectations in India.
Many in these industries that expected a higher rate cut of 50 basis points at least, this rate cut came as a slight disappointment. However, there were reasons as to this decision taken by the RBI. Rajan for one relayed his concerns on the rise in inflation that could be expected with the below-normal monsoons prediction by the Indian Meteorological Department (IMD). The IMD prediction also put in a 90% probability of the El Nino effect (large climate disturbances which occur every 3 to 7 years) hitting the country. This is expected to have an adverse effect on agricultural output which is one of the key drivers for the economy. With shortage in food supply and inflation in prices is definitely expected to follow. Apart from this it will also have a direct effect on the rural income and their spending power. The FMCG sector is also expected to suffer adverse effects especially in terms of raw materials and rural spends. The RBI governor added that only if astute food management is put into place by the government it would be possible to mitigate the risk of this inflation. The RBI also increased the inflation forecast from 5.8% earlier to 6% by January 2016.
Apart from inflation hitting the Indian economy the other issue highlighted by the RBI governor was the rising crude oil prices which have been volatile recently. This too will add to the inflationary risks that the economy is facing. With oil prices going up, the impact to various industries from FMCG to retail to automobile and BFSI is eminent. Not only will this discourage consumers from purchasing automobiles with higher petrol/diesel prices but with a rise in distribution prices FMCG and retail will have to pass on the burden to end consumers. With sales down of companies they will be expected to keep their expansion plans on hold and hence borrowing reduces which affects the BFSI sector.
The third influencing factor for RBI’s decision to go easy on the rate cuts is the fact of the volatility in the external environment that could have an impact on inflation. This could include any dips in any of the world economies or disturbances in world trade could have its implication back home.
Rajan however highlighted the need for strong food policy and management from the government in order to contain the inflation in the near term and would enable monetary policy easing. The central bank said, “Furthermore, monetary easing can only create the enabling conditions for a fuller government policy thrust that hinges around a step up in public investment in several areas that can also crowd in private investment. This will be important to relieve supply constraints and aid disinflation over the medium term.”
The central bank highlighted in order to boost investment in the economy, which has been facing some stress of late, much was needed to be done by the government. The governor also stressed on the fact that much is needed to be done in the public banking sector which has been facing problems with the increasing number of NPA (non-performing assets). The government solving this problem would allow a free flowing of credit to productive industries and boost investment. “A targeted infusion of bank capital into scheduled public sector commercial banks, especially those that implement concerted strategies to clean up stressed assets, is also warranted so that adequate credit flows to the productive sectors as investment picks up,” he said.
Though the repo rate cuts have infused some growth into the economy and industries in the near term, the cautionary sentiment expressed by the RBI governor definitely spells rough times ahead for the key sectors for the growth of the economy. This in turn could see its effects on the marketing spends of companies from these various industries.