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Weakness in growth is the biggest challenge for the new government, says HSBC India

Updated : May 30, 2019 01:07 PM IST

Hitendra Dave, head of global banking and markets, HSBC India, shared his views on the new government's priorities should be when it comes to the financial sector.

“It is very clear that all incoming data since last Diwali have indicated that there is a slowdown – it is a various series of sectors which were experiencing it. So I think the number one task for the finance ministry and the finance minister would be to try and ascertain whether it is cyclical, whether it is sector specific, whether it is structural – if it is structural, what should be done, if it is cyclical then you can afford to be a bit more patient in policymaking and decision-making. However, my own guess is that when we get the gross domestic product (GDP) print for quarter ended March, it might be disappointingly low and that should spur people into action a lot more decisively,” he said.

“Base case looks like 6 percent with a possible downside risk there because all the indicators for that quarter across the number of sectors have indicated a significant contraction in demand vis-à-vis the year ago numbers. It is also a quarter in which there was a brake on government spending to align with the budget that was made earlier.

"So it certainly looks like the full year projections will have to be scaled down for the previous year and if the current fiscal year we have entered with that sort of momentum — even the current projection of 7.2 or so for this fiscal year — you would have to say that if the momentum is slow unless there is a significant U-turn, which people have experienced either in April or in May or immediately then even that potentially could be looked for the review on the downwards. The weakness in the growth is the biggest policy challenge in front of all policymakers,” he added.

In terms of bond yield curve, Dave said: “It is unfortunate for us at a level that our slowdown, which is entirely due to domestic factors, is coinciding with at least financial markets indicating that there is a growth slowdown around the corner in the big economies like the US and maybe the euro zone and to that extent if external demand was going to bail you out, it doesn’t look like that is going to be bailing you out.

"Regarding inverted yield curve, many times it has been a lead indicator of recessions. In other situations, it has been an indicator of other things. So I think it is too early. To my mind, an economy where unemployment rate is close to 3.6-3.7 percent, there has to be something material to trigger the kind of recessionary indicators that an inverted yield curve is giving but from an India perspective, to the extent that Indian bond yields have also been sliding, I think so far Indian bond yields were reacting largely to softer than expected inflation prints.”

He added: "My guess is a lot more people now are focusing not so much on inflation but on the fact that there are too many sectors reporting relatively weak volume data and is the indicator of a wider slowdown in the economy and whether the policymakers would need to react to that.”
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