India Investors Brace for Pain on Poor Growth, Trade Status Loss

(Bloomberg) -- Indian investors already facing a much-anticipated central bank decision this week will now have to juggle the implications of an economic soft patch and Donald Trump making good on his trade threat against the nation.

Growth cooled to 5.8% in the first three months of the year, the slowest pace in several quarters, according to a report on Friday. That took the expansion in the fiscal year to March 2019 to 6.8%, lower than the 6.9% median estimate in a Bloomberg survey. The data has also intensified calls for the Reserve Bank of India to loosen monetary policy and the government to boost fiscal policy.

Added to the mix was the U.S. announcing on Friday that it would terminate India’s designation as a developing nation effective June 5, eliminating an exception that allowed the country to export nearly 2,000 products to the U.S. duty-free.

“A third consecutive rate cut now looks a done deal at the RBI’s meeting” this week, Shilan Shah, senior India economist at Capital Economics in Singapore, wrote in a May 31 note. “There is also a growing chance that the finance ministry, now under the stewardship of Nirmala Sitharaman, opts to relax its fiscal deficit target for this year.”

Despite the central bank’s two interest-rate cuts this year, borrowing costs in the economy aren’t coming down fast enough. Liquidity has also dried up in recent months as demand for cash picked up ahead of India’s six-week election.

That’s kept a lid on investment and consumption in the economy, and adds to pressure on the central bank to take more easing action this week. Not only by lowering interest rates, but also by adjusting its monetary stance to an accommodative one and injecting more liquidity into the financial system.

“Is there a room for rate cut? Yes, definitely,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. in Mumbai. “But unless the market is comfortable with respect to expectations on liquidity those cuts will not get fully transmitted.”

The benchmark 10-year bond yield dropped 8 basis points to 6.95% on Monday -- its lowest since late 2017 -- after having shaved off nearly 40 basis points last month amid a drop in oil prices and a global rally in sovereign bonds.

Constrained by a widening budget deficit, Prime Minister Narendra Modi -- who was sworn into office for a second term last week -- may increasingly look to the RBI for help in spurring lending and growth. Inflation has also been relatively benign, well below the bank’s 4% medium-term target, giving policy makers ample room to ease.

Governor Shaktikanta Das will probably reduce the repurchase rate by 25 basis points to 5.75% on Thursday, according to 16 of 25 economists surveyed by Bloomberg.

The Trump administration has said concerns over market access for U.S. goods being exported to India led them to withdraw the benefits, which prohibited duties on about $5.7 billion in imports in 2017, according to the Congressional Research Service. India’s opposition Congress party warned there are “grave trade and economic implications” from Trump’s decision.

Despite the central bank pumping in cash via open market bond purchases and foreign exchange swaps, financial conditions have been tight in the past few months.

According to Deutsche Bank AG, the net deficit on rupee liquidity has averaged $8 billion in the past six months. The Reserve Bank of India will look to possibly shift toward a surplus of between $2 billion to $4 billion over the next six months as it tries to fix the problems with the shadow banking sector and improve policy transmission, it said in a report.

What Bloomberg’s Economists Say

“We expect the RBI to reduce the repo rate by another 25 basis points at its June 6 policy review and -- importantly -- shift to targeting a surplus in banking system liquidity to counter a slowdown in growth.” He sees the RBI’s terminal rate at 5.25%, implying two more rate cuts after a June move.
-- Abhishek Gupta, India economist

The central bank plans to publish more information on how it assesses liquidity conditions in the banking system in an effort to provide greater clarity to the market, people familiar with the matter told Bloomberg.

“The market appears comfortable with further RBI cuts with short-term yields and swaps pushing lower post elections,” said Eugene Leow, a rates strategist at DBS Group Holdings Ltd. in Singapore. “We think that the market is on point with the next cut likely to come in June.”

Below are key Asian economic data and events due:

• Monday, June 3: Japan capital spending, manufacturing PMI across Asia, Malaysia trade balance
• Tuesday, June 4: South Korea GDP, South Korea CPI, Thailand CPI
• Wednesday, June 5: South Korea FX reserves, South Korea balance of payments, Taiwan CPI, Services and composite CPI across Asia
• Thursday, June 6: Thailand consumer confidence, RBI rate decision
• Friday, June 7: Thailand forex reserves

--With assistance from Ronojoy Mazumdar.

To contact the reporters on this story: Anirban Nag in Mumbai at anag8@bloomberg.net;Subhadip Sircar in Mumbai at ssircar3@bloomberg.net;Debjit Chakraborty in New Delhi at dchakrabor10@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram

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