RBI Likely to Maintain Status Quo on Interest Rates: SBI

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Soumya Kanti Ghosh, chief economic advisor at State Bank of India (SBI), said that the government’s policy initiatives will take some time to make their impact felt on the ground. “We have to be a little bit patient. Policy initiatives on smart cities, roadways projects and infra push take a little while to make their impact felt on the ground. Maybe 5-6 months down the line you can see a visible impact,” he said. (Watch)

Has the economic recovery started in the context of third-quarter earnings?

The economy may have bottomed out. But I am not optimistic of an immediate economic recovery.  Our index (manufacturing) for the month of December and January does not look too encouraging. What has changed in last one month is the dramatic change in the global economy. The global economic prospects are turning for the worse. This is going to have some debilitating effect on Indian economy as a whole.

I will not be surprised if the third quarter numbers come a little bit weak. Also, banks are cleaning up their balance sheets. Economic recovery will have to wait for a couple of months more before we see visible improvement on the ground.

What are your expectations from RBI in 2016?

Global central banks are seeing that global growth is faltering. The US data suggests mixed signals. My sense is that the RBI will take these global factors into consideration. However, RBI will possibly go for a status quo on February 2. RBI will look at the budget numbers.

I would not be surprised if the RBI goes for an off-policy rate cut after February and that could happen in March.  The inflation trajectory is likely to remain benign even for the course for the next fiscal. There is no reason for oil prices to go up significantly.  Rate cuts are going to happen for next couple of months.

The underlying economic data suggest a recovery. But why is it not translating into corporate earnings?

There has been some improvement in margins in the second and third quarter because of a fall in input prices. But for a significant improvement in earnings, I still believe it will take some time. I still believe the stress has not completely gone out of the system.

What is your outlook for asset quality of banks for 2016?

Asset quality has been an issue for the banking system. I don’t think things will improve dramatically. But things are actually bottoming out.  But it could take 3-4 years for banks to fully come out of the stress. So some dramatic things should be done to resolve the issue. The government is aware of the situation. The bankruptcy law is coming into the picture. If possible, other solutions like bad bank could be looked at. Otherwise, the time taken for resolution could be longer.

What is holding back credit offtake?

The credit growth in the last two months has picked up a little. But it is still not satisfactory. There is not enough demand from the corporate side.  Credit demand will come back slowly into the system. As long as there is stress on the balance sheets of corporates, the credit growth may be muted.  As of now, I don’t expect visible improvement in the credit growth.

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