RBI policy is on High - What is the Impact on Stock market?

In the April 2017 Policy, the Reserve Bank of India was hawkish on inflation and bullish on growth. What has happened over the past two months suggests that its fears and hopes were somewhat misplaced: inflation has nosedived, and so has growth. Will this potent combination of softer prices and faltering growth prompt the RBI to budge?

Not so quickly perhaps. The ground reality might warrant a change in policy stance from ‘neutral’ to ‘accommodative’ before the Street should start expecting a decisive rate cut.

Soft Growth and Benign Outlook

The latest GDP print deserves attention. The headline growth number showed the GDP falling to 7.1 percent in FY17 compared to 8 percent in the previous fiscal and the gross value added (measure of real economic growth) falling to 6.6 percent from 7.9 percent in the previous fiscal. In fact, the GVA at constant prices at 5.6 percent in the fourth quarter of FY17 is the weakest in the past two years. However, the number that should really concern policy makers is the investment rate measured by gross fixed capital formation – that has declined from 31.2 percent in Q1 FY16 to 28.5 percent in Q4 FY17.

Can rates revive the economy? There is no straight answer. But the road ahead has multiple soft patches, hence we are quite circumspect about RBI’s bullish stance on growth in FY18.

While prima facie the GST regime is unlikely to be inflationary, we believe industry is likely to pare inventory levels during the transition to the GST, mildly dampening production in Q1 FY18. Moreover, Q2 and Q3 are likely to witness some adjustment as businesses get used to the new compliance procedures and higher working capital requirements. The positive impact of the GST on economic activity is likely to be visible only from Q4 FY18 onward.

The resolution of the bad asset problem through the Insolvency and Bankruptcy Code could exert further pressure on the financials of banks, should the quantum of haircut far exceed the existing provision, and could turn them more risk-averse in the short term. Recent data suggests the deceleration in bank credit continues unabated in the current fiscal.

For more updates visit us at https://www.starindiaresearch.com/services.php or give missed call at 8817002233