A Fiscal Stimulus Package Would Mean Precious Little For The Indian Economy, Says BofAML
(Photographer: Dhiraj Singh/Bloomberg)  

A Fiscal Stimulus Package Would Mean Precious Little For The Indian Economy, Says BofAML

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Despite four RBI rate cuts in 2019, financial conditions in India have deteriorated so much that even a fiscal stimulus package would do precious little to spur the Indian economy, Bank of America Merill Lynch said in a report on Thursday.

BofAML's report on state of the Indian economy comes a day after Nomura Holdings Inc. predicted that India’s gross domestic product would expand by 5.7 percent in the April-June quarter of 2019, slower than the 5.8 percent GDP growth recorded in the previous three months.

The Central Statistics Office will release Q2 GDP 2019-20 data on Aug. 30.

Falling stocks, an overvalued rupee and higher volumes in the dollar-rupee market are evidence of tightening financial conditions, said BofAML in the report.

“We believe the economy warrants a significant fiscal stimulus at this stage which does not result in higher borrowing costs,” the report said, but was quick to warn that it may not yield the desired results due to the fiscal constraints of the government.

"What India needs is a fiscal boost funded by offshore borrowings. But a fiscal stimulus package is unlikely to be a game-changer due to the fiscal constraints," it said. The stimulus package will have to be announced alongside a dollar bond sale so as to not disrupt the local currency bonds.

Policymakers will also have to somehow inject more liquidity into the troubled shadow banking sector and douse any concerns around them, the BofAML report added.

According to the BofAML report, “most” of the tightening of financial conditions are due to the weakness in the equity markets. India’s benchmark indices have fallen over 10 percent since June, a trend BofAML attributed to “lack of any fiscal stimulus in the budget".

Also read: Unskilled Workers Battle Despair In A Slowing Indian Economy

The brokerage said it was “very strange” to see that the government is sticking to fiscal consolidation in 2019-20 “when the backdrop is clearly deteriorating”.

The Reserve Bank of India has reduced the repo rate by a cumulative 1.10 percentage points in four successive rate cuts since February, while its monetary policy stance continues to be accomodative.

To be sure, the government had in the budget announced plans for a sovereign bond sale in the overseas market, but many are not enthused with the plan.

These include former RBI governors, economists and other analysts, who point out that India had not resorted to such a move even after the 1991 crisis. According to some media reports, the government is planning to raise up to $10 billion in October.

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