Care Ratings Survey Paints Mixed Picture of Indian Economy in FY16

<div>The latest Care Ratings survey on the Indian economy indicates that country's economic growth is likely to improve in the current fiscal with the majority pegging gross domestic product (GDP) growth between 7.5-7.9 per cent. Also, prospects of a rate cut by the Reserve Bank of India (RBI) are widespread with a majority expecting a 50 bps cut before the end of this fiscal.</div><div>&nbsp;</div><div>The central bank will review its monetary policy on September 29, but market analysts are betting on a rate cut before the scheduled policy.&nbsp;</div><div>&nbsp;</div><div>Indian growth slowed by more than expected in the quarter to June, a setback for Prime Minister Narendra Modi that will prompt more urgent calls from his aides for interest rate cuts. The latest data showed gross domestic product (GDP) expanded at an annual 7 per cent rate in the April-June quarter, matching China, but slower than provisional growth of 7.5 per cent in the previous quarter.</div><div>&nbsp;</div><div>The data will also strengthen the calls from Modi's government for a rate cut. According to media reports, some bureaucrats are already arguing for an immediate cut of as much as 50 basis points in the RBI's main 7.25 per cent policy rate.</div><div>&nbsp;</div><div>Many in the government are worried that growth could slip below the official target of 8 to 8.5 per cent for the year to March, and see the central bank's caution as worsening the situation.</div><div>&nbsp;</div><div><strong>Inflation</strong></div><div>According to the survey, although price levels could be pressured owing to domestic as well as global factors viz. sub-normal monsoons in the country and sudden increases in global commodity prices, the general perception appears to be that the increase in price levels would be more less than the increase recorded last fiscal owing to the subdued global commodity prices and domestic conditions. Retail inflation in FY15 came in at 5.9 per cent. A large number of respondents (59 per cent) do not expect inflation in FY16 to surpass 5.9 per cent.&nbsp;</div><div>&nbsp;</div><div>An overwhelming 83 per cent of the people predict a rate cut by the central bank in the coming months.</div><div>&nbsp;</div><div><strong>Rupee</strong></div><div>The exchange rate is expected to weaken from the current levels of Rs.63.4 to be in the range of Rs.64 -65.9/US dollar. The rupee is vulnerable to external factors, the most significant being the Federal Reserve's policy action on interest rates, the survey said.</div><div>&nbsp;</div><div><strong>Banks</strong></div><div>The banking sector is likely to be under pressure on the non-performing asset (NPA) front. The survey suggests that "banks are unlikely to get a respite from their stressed assets situation. Over half the respondents foresee an increase in the level of bank NPAs in FY16."</div><div>&nbsp;</div><div><strong>Capital Market</strong></div><div>A majority of the respondents (75 per cent) are of the view that the capital markets would witness an increase and the benchmark Sensex is expected to rule over the 27,000 levels this fiscal.</div><div>&nbsp;</div><div><strong>Investment Climate</strong></div><div>As much as 85 per cent of respondents are convinced that overall investments in the country to improve in the current fiscal year. The survey findings reiterate the importance of the ease of doing business, the clearing of stalled projects and FDI for boosting investments. More than 60 per cent of the respondents find these measures of the government as being helpful in reviving domestic investments.&nbsp;</div><div>The National Democratic Alliance government's foreign policy initiatives were being viewed as steps taken in the right direction.&nbsp;</div><div>&nbsp;</div><div><strong>Corporate Sector</strong></div><div>Although the corporate sector is expected to clock better performance than that in FY15, the improvement this year is largely projected to be modest with a large section of the respondents (over 80 per cent) expecting both sales growth and net profit growth to be not more than 10 per cent. With the domestic demand yet to pick up and with global demand also being tempered, corporates are unlikely to see a jump in their sales. Corporates can however hope to get continued relief on the expenditure front from the moderation in inflation.&nbsp;</div><div>&nbsp;</div><div>In a nutshell, the survey indicates a mixed picture for the Indian economy in FY16. While on the one hand GDP is likely to see favourable growth, inflation expectations are subdued, but the capital markets are to be elevated. Investments too are expected to increase but the exchange rate is unlikely to see sharp depreciation.&nbsp;</div><div>&nbsp;</div><div>With private investments likely to seen only a marginal pick-up in the near term, the government will have to bear the responsibility of increasing investments and thereby create the critical link for private investments and economic growth.&nbsp;</div><div>&nbsp;</div><div>With indications of government spending in road and infrastructure, the investment cycle may be taken as being in the nascent stages of revival. Sustained increase in overall investment is contingent on growth inducing policy reforms.</div>