Rating agency, ICRA, expects an extended pause on Reserve Bank of India's policy rates, with monetary easing getting stretched until at least early-2015. This is seen dampening any early revival in the other sectors of the economy as well and the sticky rates would limit improvements in consumption demand, ICRA said in its latest report on Thursday.
The expectation of below-average rainfall in conjunction with the structural factors that exert stickiness on food and non-food CPI inflation would make it challenging to contain CPI inflation below 8% by January 2015.
ICRA said a broad-based investment revival was unlikely until there was a satisfactory resolution to sector-specific issues including fuel linkages for power; high leverage levels and tight liquidity of the developers and asset quality concerns of banks along with a stable political outcome after the parliamentary election. Overall, ICRA expects GDP growth to improve somewhat to 5.0-5.5% in 2014-15, factoring in a mild improvement in manufacturing growth and a pickup in investment activity in H2FY15.
Based on an expectation of real GDP growth in excess of 5%, ICRA expects bank deposit growth during FY15 to be in the range of 12.75-13.50% and credit growth to remain moderate. Retail loans, however, will be the focus area of banks.
Corporate lending is expected to pick up post a broad-based revival in economic growth and post the financial health improvement of the corporate sector, ICRA said. Overall, the rating agency expects credit growth during FY15 to be in the range of 13.50-14.50%.
The relatively high inflation and tight monetary policies are likely to result in domestic rates remaining substantially firmer than those of advanced economies, the near-to-medium term outlook for foreign portfolio inflows to India, however, remains favourable.
The magnitude of FII flows in the near term will be closely linked to global liquidity conditions, sentiments following the results of general elections in India, the volatility in exchange rates and equity markets, ICRA said.
In spite of the firm domestic borrowing costs, ICRA expects the high forex hedging cost to keep external commercial borrowings an attractive option only for companies with natural forex hedge. Even raising overseas funds through the foreign currency convertible bonds is unlikely to turn attractive in the near term.
In pursuance of the Dr Jujitsu Patel Committee's recommendation to de-emphasise overnight "guaranteed-access" windows for liquidity management and progressively conduct liquidity management through term repos, ICRA expects term repos to be RBI's primary tool to manage liquidity.
With benchmark interest rates not witnessing any signs of easing and corporate bond yields remaining high, the corporate debt market may remain subdued in FY15, in line with the 27% decline in issuance in FY14 compared to FY13 as per ICRA estimates. Going forward, the new Companies Act could act as a dampener for fresh bond placements, especially for NBFCs that are the largest issuers in the bond market and heavily reliant on bonds as a source of funding. The new rules related to the creation of debenture redemption reserve account along with the high borrowing cost may keep the mobilization through bond markets low, at least in the near term.