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BW Businessworld

Defying Expectations

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Will the March quarter advance tax outflows squeeze inter-bank liquidity as it did in the previous quarter? Analysts think it will not. “I do not get a sense of déjà vu,” says Shubhada Rao, chief economist at Yes Bank. “The situation is not going to be like in September.” Her optimism stems from the fact that banks seem to be flush with liquidity as evidenced from the Rs 16,000 crore they parked at the Reserve Bank of India’s (RBI) repos window. “Call rates went to as high as 4.10 per cent and that seems to indicate that banks might have lent some more at these rates as well. And, therefore, it is reasonable to assume that the overnight fund position is comfortable,” she says.

It was advance tax outflows of Rs 48,000 crore from the banking system, which also took time in flowing back that saw call rates climb in excess of 20 per cent in September 2008. However, the amount is expected to be significantly lower this quarter.

Credit growth has moderated to 19 per cent levels from the 25 per cent levels between April and December 2008. Rohini Malkani, economist at Citi-India is of the view that the two key factors for the dip in loans are lower economic activity and fears of a rise in bad loans. “This could escalate the negative feedback loop tightening financial conditions, weakening activity, further tightening in credit standards, which would result in growth remaining weaker for longer,” she says.

So, liquidity is unlikely to be an issue. And a cut in key rates might not be in the offing anytime soon despite inflation falling to 2.4 per cent at end-February from a high of 12.8 per cent in August 2008. Reserve Bank of India (RBI) Governor D. Subbarao has delivered 400 basis points (bps) of cuts in the cash reserve ratio (CRR) since mid-September, taking it down to 5 per cent; and 400 bps and 250 bps cuts in the repo rate and reverse repo rates. Most analysts expect a further 50 bps cuts in all three rates sometime in the second quarter of 2009-09.

There is another reason why the RBI may not go ahead with rate cuts anytime soon. According to HSBC’s Singapore-based economist Robert Prior-Wandesforde, it is the stubbornness in consumer price inflation. “The key difference between the two measures of inflation relates to the importance of food,” he says. “Whereas food products only account for 15 per cent of the wholesale price index, they represent nearly 70 per cent of the agricultural workers’ basket. Food CPI inflation reached a cycle-high of 12.7 per cent in January, undermining the incomes of hundreds of millions of households who don’t sell food products for a living,” he says.

Madan Sabnavis, chief economist at MCX, says that there is no reason to fear the Ides of March. “A fall in advance tax collections will mean that there will be further deterioration in the fiscal situation. I do not see a reversal in corporate performance anytime soon.”

The larger point is that the combined fiscal deficit is expected to be in double digits in 2009-10. The key reasons for this trend reversal, explains Malkani, are higher expenditure (but not the good kind), a slowdown in revenues and the stimulus packages. “While a high fiscal deficit is not necessarily bad, what is of importance is how it is utilised. In India, the revenue deficit or current consumption comprises the bulk of the fiscal deficit. The primary balance that was in surplus mode in 2007-08 has moved back into deficit,” says she.

However, there is some concern about liquidity. Money supply growth has moderated from the 20 per cent-plus levels to 19 per cent as on date. Given the Centre’s net borrowing programme of Rs 3,08,647 crore in 2009-10 — up from the Rs 2,61,972 crore in 2008-09 — it is real bad news. The money pond is shrinking.

(Businessworld Issue Dated 24-30 March 2009)