Even stimulus may not save economy, warns Bofa

The US-headquartered multinational investment bank Bank of America-Merill Lynch (BoFAML) has said that the likely stimulus won't help the Indian economy in recovery.

In a report on Thursday, BoFAML said: "While the government can certainly announce 'a package', we believe it is unlikely to be a game-changer anytime soon simply because of the constraints it faces from the fiscal point of view."

Under pressure from the industry, especially auto and real estate sectors, that have seen their sales dip southwards at an unprecedented rate, the government is said to have been mooting over a stimulus package. Recently, in a bid to consumption, the government directed banks to make credit available easily. Also, the Reserve Bank has cut repo rate by 110 basis points in four consecutive rate cut, in a bid to boost growth.

Falling stocks, an overvalued rupee and higher volumes in the US dollar-rupee market are evident of the tightening financial conditions, Bank of America Merill Lynch said in a report Thursday. Since June 2019, Indian equities have declined by more than 10%. "Lack of any fiscal stimulus in the July budget announcement has been one of the big reasons for this sell-off. In fact, it was very strange to observe that the government even targeted fiscal consolidation in FY 2019-20 when the backdrop was clearly deteriorating," it added.

We believe the Indian economy warrants a significant fiscal stimulus at this stage which does not result in higher borrowing costs, it said adding that what India needs is a fiscal boost funded by offshore borrowings.

"The only way to achieve this is by tapping into the global savings which are in a massive search for higher yields," it said justifying its reasoning.

The report also sought the government to maintain lower volatility in the rupee-dollar exchange rate, along with injecting more liquidity into the shadow banks.

"Finally, policymakers will need to somehow inject more liquidity into NBFCs/HFCs and douse any concerns around NBFCs/HFCs. Despite some measures to alleviate NBFC/HFC liquidity concerns, lower yields are not benefitting NBFC/HFCs - even the high-quality ones," it said.