Global economy continues to suffer slowdown as the countries like China, Russia and Brazil are still facing serious economic difficulties. Even though advabced economies are gradually
picking up, itrs pace of growth is not sufficient enough to pull the global GDP. This has also posed risk to emerging market economies due to deterioration in global trade. IMF has cut its global GDP
forecast to 3.% for the current year which is lower than its earlier projection of 3.5% mainly because of downside risks to growth associated with emerging market and developing economies.
Amidst the weak and challenging global economic environment, the country’s economy also suffered slowdown as GDP declined from 7.5%
service sector grew by 1.9%, 6.5% and 8.9% respectively in Q1, FY 2015-16 as compared to 1.4%, 5.6% and 9.2% respectively Q4, FY 2014-15. Weak demand and low capacity utilisation are still posing difficulties in reviving
the private corporate investments cycle. The Reserve Bank of India has lowered irts economic growth forecast for FY 2015-16 to 7.4% from the earlier predication of 7.6%.
The cumulative growth in IIP (Index of Industrial Production) during April-August, 2015-16 stood at 4.% as compared with 3.0%
sector performance. Manufacturibg sector which constitutes 75% weight in the IIP grew by 4.6% during April-August, 2015-16 as against 2.0% during the corresponding period of the previous year. The sharp rise in factory output shows
that economic recovery has been set in motion.
On the flip side, the country’s foreign trade is witnessing sharp decline due to weak external environment. During April-August 2015-16, exports were $111.09 billion,
which was 16.7% lower than exports during the comparable period of the previous fiscal whereas, imports was $168.61 billion which was lower than 11.61% during the corresponding period of the previous year.
The WPI inflation during April-August 2015 averaged (-) 3.2 per cent while inflation as per CPI (Combined) aeraged 4.5 per cent during the period. The lower level of oil prices helped in containing fiscal and current account deficits
o the country. The rupee has outperformed most of its peers in the emerging the country. The rupee has outperformed most of its peers in the emerging economies and the trend is likely to continue as the chance that FED will raise
the interest rate in December seems to be bleak.
As per the latest available data (Sep.18, 2015), Scheduled Commercial Bank’s sits grew y-o-y by 11.2% to Rs.89593.6 billion as against a growth of 12.6% recorded during the corresponding period of the previous year. Whereas0 SCBs’ credit contiue to grow in single
digit at y-o-y 9.6% to Rs.67060.5 billion upto Sept. 18, 2015 as against a growth of 9.2% recorded during the corresponding period of the previous year. The money supply grew 11.0 per cent y-o-y to Rs.110246.2 billion as at Sept.18, 2015 as against a growth of 12.4%
recorded during the corresponding period of the previous period.
Public Sector Banks are still facing challenges relating to their deteriorating asset quality, as NPAs grew more thn the credit growth rate. This is mainly because of less than expected GDP growth, continuing uncertainly in global market and lower growth in credit. Further
stock of stalled projects rose to 7.6% of GDP in Q2, FY 2015-16. The high level of NPAs is hurting banks by preventing increase in the loan book, leading to adverse impact on profitability.
The Reserve Bank of India has made a sharp 50bps cut in the repo rate from 7.25 to 6.75 in its bi-monthly monetary policy review on September 29, 2015. Whle on the one
hand this has given banks the benefit of mark to market gains on their securities, on the other hand base rate cut by various banks is going to have an impact on their NIMs. Hence, Banks have started realigning their deposits
and lending rates meticulously, keeping in view their NIMs. Since the gains from treasury side are not sufficient to compensate weak credit growth and interst income, we assume that the pressure on profitability of PSBs will continue in the subsequent one or two quarters also.
Even though near-term growth prospects of the country remain favourable, it is surrounded by considerable uncertainties in terms of lower than expected growth in GDP, delay in implementing key reforms on the domestic front, monsoon related disturbances, external volatilites and spillover
effect from China, Russia and Brazil on exchange rate and asset price movements in the global market. We expect that credit growth will pick up in the next quarter.
