Expert Opinion  ^{123    15}   

Published: Dec 29, 2021
Updated: Dec 29, 2021

Low private spending stalls growth

According to the Indian National Statistical Office, the Indian economy expanded by 8.41% in the second quarter of fiscal 2021-22 compared to the corresponding quarter in fiscal 2020-21. However, following the economy’s 20% expansion in the first quarter of this fiscal, can the 8% growth in the second quarter be seen as evidence that India is returning to growth after the pandemic-induced slowdown?

PFCE’s recent trends indicate that the labour market is still depressed following the unprecedented shocks caused by the lockdown following the pandemic. According to the Centre for Monitoring Indian Economy, although the unemployment rate decreased during the second quarter of FY22, the labour force participation rate did not quite recover from the depths it had fallen to during Covid-19.

The Society of Indian Automobile Manufacturers (SIAM) reported that wholesale passenger vehicle numbers in India fell 18.60% yoy in November due to a shortage of semiconductors. Last month, passenger vehicle sales totalled 215,626 units, down from 264,898 units a year ago.

ERRATIC MARKETS

India’s capital markets continue to experience whipsaws as the broader mood continues to remain ‘sell on rise’ with bears counteracting bulls on every significant upward movement. After the conclusion of the Monetary Policy Committee (MPC) meeting on December 8, 2021, the RBI maintained its accommodative stance while keeping the policy repo rate unchanged. The policy repo rate remained at 4%. The reverse repo rate is 3.35%. At 4.25%, the Marginal Standing Facility rate (MSF) remained unchanged. The MPC stated that the policy would remain ‘accommodative’ until there is sustained economic growth. The RBI maintained the GDP growth forecast for FY22 at 9.5%. It held the CPI inflation projection at 5.3% for 2021-22.

The central bank’s MPC meeting helped lift the markets’ mood as the policy was more dovish than anticipated. However, the MPC’s approach appears to have a more considerable bias towards growth drivers and underestimates inflation, as it reduced the inflation forecasts for Q4FY22 and Q1FY23 to 5.7% and 5% respectively. At the same time, the US Federal Reserve is considering retiring the term ‘transitory’, indicating that inflation is here to stay. Indeed, some countries such as New Zealand and South Korea have already raised interest rates. Russia and Great Britain are likely to follow suit as several central banks increasingly recognize inflation as a critical risk and are announcing policies to contain it. India still looks to be a backbencher on this front and may set a roadmap for future rate hikes based on future policies.

However, why is the RBI still biased towards growth and not seeing high inflation trends? This is because the recovery has been uneven. Although the GDP numbers seem encouraging, private consumption, accounting for 60% of our GDP, remains 3% below pre-pandemic levels. The unorganized sector is still suffering from pandemic blues and is under-represented in the GDP numbers. The FMCG sector’s post-earnings management commentaries stressed that rural demand is declining. Although GDP numbers are mildly above pre-pandemic levels, our growth is far behind what it would have been had the pandemic not happened. Taking into account these factors, as well as the potential threat posed by Omicron, it appears that MPC’s best option at this time is to continue supporting the broader economy. However, only time will tell how long inflation can be put on hold in the RBI’s strategy.

After witnessing a bounce from the demand zone around 17,000, the Nifty 50 closed positive for the second week. Currently, the index is trading around its 20 DMA and facing resistance around 17,550. Moreover, in the last two trading sessions of the week, Nifty 50 continued to trade below the significant rising trend line. In a similar vein, Bank Nifty is also struggling to surpass its resistance at 37,440. In the near term, all of these indicators indicate a limited upside.

US FED INFLUENCE

Indian benchmark indices will be dominated by domestic inflation and the FOMC meeting. The RBI did not provide any guidance on the rate hike calendar so that all eyes will be on the stance of the US FOMC (Federal Open market Committee) on tapering and interest rate hikes. It is widely expected that the US Fed would consider Omicron’s intensity before aggressively preparing tapering plans, but any surprises can cause jerky movements. Therefore, investors should remain cautious and consider value investing until markets have let off steam from excess valuations.

(Dr VVLN Sastry is a post doctorate in Economics and a PhD in Law & Public Policy. He is a passionate economist, financial analyst and law expert.)