BofA-ML sees these three event risks to grip Indian economy soon

 BofA-ML sees these three event risks to grip Indian economy soon

  

Bank of America Merrill Lynch expects Reserve Bank of India (RBI) to consider 25 basis points (bps) cut in interest rates in its next policy meet scheduled to take place on August 09 on good monsoons, although June Cosumer Price Index (CPI) inflation may rise to 6.2 per cent on a poor summer crop.

The brokerage believes banks will cut rates by 50 bps by September.

Ads by ZINC

The brokerage, in its India Economic Watch report, advised the investors to track RBI open market operations (OMO) that holds the key to lending rate cuts with global uncertainty drying up foreign inflows.

Below are three event risks that, according to BofA-ML, are lurking around and may have an impact on the liquidity scenario in the economy:

1) Tax amnesty scheme

The govt once again launched an amnesty scheme to encourage Indians with hidden assets abroad to come clean, and has also softened the tax blow on the same. The black money hoaders can now pay effective tax - including surcharge and penalty - of about 31 per cent against 45 per cent stipulated in the Income Declaration Scheme 2016.

"We assume that the government is able to raise Rs 870 billion (with Rs 1930 billion disclosed) through the on-going income disclosure scheme that ends September 30," said BofA-ML.

The liquidity impact will be a 3-stage process:

×

If Rs 100 is declared, the 55 per cent, which turns legitimate, will directly enter the banking system to improve liquidity by reducing cash with the public.

The 45 per cent that will be paid as tax to the government should be credited to the treasury bypassing banks initially. As this will increase the government's surplus balances with the RBI, it will contract money market liquidity.

This will enter the banking system when the government spends the monies, say, when it pays out Pay Commission arrears.

2) 7th Pay Commission arrears

The pay hikes for government employees will amount to Rs 1.02 lakh crore, or nearly 0.7 per cent of GDP and will further lubricate the economy in the spending- investing cycle.

"Any tightening due to bunching up of outflows under the tax amnesty scheme in end-September should be offset by the payment of Rs 300 billion-odd of arrears to implement the 7th Pay Commission before the October 30 Diwali," said BofA-ML.

3) FCNR scheme withdrawals

RBI governor Raghuram Rajan had introduced the Foreign-currency non-resident (FCNR) scheme in September 2013 to support the rupee fall at a time when the currency was ruling around all-time low.

A large chunk of these FCNR deposits will mature in September. The possible shortage of dollar, if NRIs redeem their deposits instead of rolling over, may put pressure on the domestic currency.

Banks should be able to fund FCNR outflows from their nostro FX balances, although withdrawal beyond US $10-15 billion, will likely require intervention in the forex market by RBI.