Govt, RBI's in-sync approach to economic growth inspires confidence

Street expecting across-the-board earnings acceleration in FY22

It was the first time since February last year that Reserve Bank of India (RBI) Governor Shaktikanta Das gave a confident guidance on the economic outlook and growth momentum.

“I would like to say that, going forward, the Indian economy is poised to move in only one direction and that is upwards. It is our strong conviction, backed by forecasts, that in 2021-22, we would undo the damage that Covid-19 has inflicted on the economy,” he said in his concluding remarks.

Industry observers say this is the most emphatic Monetary Policy Committee (MPC) speech, and regardless of whether the governor drew confidence from the government’s commitment to spend on infrastructure and health care or the improving level of economic activities month after month, his confidence isn’t misplaced.

While it was more or less a given that the MPC will not tinker with the key policy rates, there was some expectation that liquidity in the system may be curbed. But keeping pace with global peers, Das didn’t seem bothered.

“The RBI clearly communicated that it doesn’t intend to yank away the liquidity carpet in a way that it topples growth recovery,” said Aurodeep Nandi, economist, Nomura. Several other measures such as the dispensation in held-to-maturity (HTM) instruments and the graded restoration of the cash reserve ratio (CRR) have been designed keeping in mind the smooth absorption of the government’s large borrowing programme, according to Nandi. In other words, if the government needs access to funds for its budgeted expenditure, the money tap is literally open for it.

Another interesting aspect in Friday’s speech was the governor not mentioning the bubble in the equities market; this Das had warned about in his last MPC speech and also found mention in the RBI’s Financial Stability Report, January 2021. With the Sensex ahead of 50,000, this was something that caught some fund managers’ attention.

“Perhaps with the government readying up for Rs 1.75 trillion of divestment, he may have thought ‘why disturb the party’,” said a fund manager of a diversified conglomerate, adding, “or he didn’t want to harp on it”. Either way, market participants are happy.

According to Gaurav Dua, head, capital market strategy, Sharekhan, the RBI’s status quo would support growth on both pillars of policy — fiscal and monetary. “This is good news for banks and financials along with a positive rub-off to domestic cyclical sectors,” he says, adding that corporate earnings are at the cusp of a new multi-year up-cycle.

Experts expect capacity utilisation to increase from 75 per cent to 85 per cent in a year, thus leading to broad-based earnings growth.

For investors, cherry-picking stocks may become tough, with the asking rates of companies in the BSE200 index 7-10 per cent above the five-year mean valuations.