Govt double-booster may not be enough

The mood in corporate India, a day before the country's central bank and the government were to announce measures to boost the economy, is that of scepticism, anger and measured optimism on what the government may do.

"It's difficult to build in any rational expectations. They have been erratic. In the credit policy review, they did not do anything but when the market fell by 1,000 points, they brought down rates by 200 basis points,'' said Ramdeo Agarwal, MD, Motilal Oswal Securities.

"There's no sense of urgency; they have been busy fighting inflation than buying growth. More than specific measures, what will be interesting to see is if there's a change in this stance. They should seize this opportunity to boost growth,'' said Agarwal. There's also anger that despite liquidity, banks are not lowering rates.

"If there's liquidity, why are banks not bringing down interest rates? They need to bring in sufficient liquidity so that bankers believe that liquidity will remain,'' said Ajit Gulabchand, chairman, HCC, which builds dams, roads and bridges.

What can you expect?

Bankers expect RBI to drop rates though there may not be any increase in aggregate liquidity as banks are parking surplus funds with the central bank.

"I expect 50-70 basis points cut in repo rates, 75-100 basis points cut in reverse repo and a refinance line for SMEs,'' said Abheek Barua, chief economist, HDFC Bank. Romesh Sobti, MD & CEO, IndusInd Bank feels the RBI may cut repo and reverse repo rates by 200-250 basis points.

Though Barua doesn't expect a cut in SLR or CRR, there are other bankers and companies who expect the RBI to use these tools as well. Deutsche Bank India's MD and CEO Gunit Chadha feels the central bank may reduce the CRR and SLR and allow repos for more players and papers.

Some sectors like the small and medium enterprises, real estate have not been getting adequate funds and RBI may extend a refinance line or special facility whereby they can borrow at a subsidised rate.

But this may not help. Bankers feel the squeeze in credit for these sectors may continue as these sectors are considered vulnerable to slowdown and it's only rational for banks to be careful while lending to these sectors.

Even with these measures (50-70 basis points cut in repo rates, 75-100 basis points cut in reverse repo), don't expect lending rates to come down more than 50-70 points as the reduction in rates are never proportional.

Corporates, who have been feeling the heat, are betting on lower interest rates and fiscal sops to arrest the slowdown, hoping to end the fiscal on better note.

"We expect a cut in SLR by 100-200 basis points. This should provide relief to the auto industry provided banks pass on the benefit, said Venu Srinivasan, CEO, TVS Motor.

The real estate sector, where high property prices and interest rates have frozen demand, feels that lower interest rates could boost demand for homes, offices and retail destinations.

"The moment interest rates are lowered demand will resurface,'' said Shravan Gupta, executive vice chairman, Emaar MGF. There should be change in outlook towards real estate sector. Real estate has been singled out as a sector. I expect a rate cut of 100-200 basis points,'' said Hemant Shah, chairman, Akruti City

The fiscal stimulus

The major relief could come from a fiscal stimulus package to be unveiled by the government on Saturday that aims to boost domestic demand, ease refinancing for exports, and provide a fillip to low-cost housing and infrastructure sectors.  

"We need a fiscal stimulus of $25-30 billion to make any significant impact in boosting the economy. Anything less than that will be inadequate despite the concerns on fiscal slippage. You don't have an option,'' said Barua.

What the dual measures of rate cuts and fiscal stimulus could do is moderate the degree of slowdown. "Everything has come to a standstill since October. These measures will arrest the fall (in growth) but may not revive the economy,'' said Rashesh Shah, chairman & CEO, Edelweiss Capital.

"The fiscal and monetary policies are expected to boost consumption and demand for the economy. The policy measures should improve flow of credit to the industry," said Neeraj Swaroop, CEO, India, Standard Chartered Bank.

With inputs from Swaraj Baggonkar, Sapna Agarwal, Raghavendra Kamath, Chandan Kishore Kant, Nevin John  and  Shivani Shinde