India: A fresh stimulus to the economy – ING

Prakash Sakpal, Economist at ING suggests that they will be looking for more positive hard economic data from India to revise their forecast of range trading in USD/INR around 65.00 over the next 12 months (spot 65.07).

Key Quotes

“In a fresh stimulus to the economy, the government yesterday announced a Rs.2.11tr (US$32bn or 1.4% of GDP) recapitalization plan for public sector banks reeling under a huge pile of bad loans. The plan to be implemented over the next two years will be funded by 1.35tr rupees of recapitalisation bonds and 0.76tr of budgetary support. The government also announced US$108bn of infrastructure spending, especially highway development plans to be carried out over the next five years.”

“While recapitalisation will enable banks to lend more, it could also sustain the risk of more public sector bank loans turning sour, swelling the country’s NPL ratio from currently over 9%. We think infusing greater competition rather than capital would be a more credible development strategy for state-owned banks. So, nothing much excites us about the recap plan.”

“We view the announcement of the infrastructure development plan as a more significant stimulus to the slowing economy, though the long-term nature of this development spending may not quickly arrest the cyclical downturn underway for the last five quarters. That said, we believe 5.7% 1QFY18 GDP growth was the cycle low. We share the consensus view that the RBI has limited or no scope for further monetary policy easing in the current cycle, which means the onus of growth-boosting will continue to lie with fiscal policy.”

“We expect the policy announcements described above to put some life into local financial markets, especially the INR, which has come under pressure since September on reports of a large fiscal slippage in the current year. The government said it was committed to a 3.2% of GDP fiscal deficit target for FY2018 (ending in March 2018) but would review the fiscal path in December. We will be looking for more positive hard economic data to revise our forecast of range trading in USD/INR around 65.00 over the next 12 months (spot 65.07).”