As central banks globally wind back the pandemic-era measures which were intended to support growth during an economic downturn, the fears of a prolonged recession have emerged fueled by a sharp uptick in inflationary pressures and poor demand recovery. Add to this the Covid situation in China and the Russia-Ukraine war, the global economy is in a vexing position.
Bank of America’s chief investment strategist Michael Hartnett in a note to clients said that ‘inflation shock’ is worsening & that the ‘rates shock’ is just beginning. The Fed had signaled that it will likely start culling assets from its $9 trillion balance sheet at its meeting in early May and will do so at nearly twice the pace it did in its previous “quantitative tightening” exercise as it confronts inflation running at a four-decade high.
Generally speaking, India would enter a ‘technical recession’ when it sees two consequent quarters of GDP decline. Global research firm Nomura’s Sonal Varma, Chief Economist – India and Asia ex-Japan, said that amid the current geopolitical developments and central banks’ policy rollback, India may see an economic slowdown in the medium term. “There is a risk that if the export cycle globally slows and domestic policy is tightened then over the next 12-18 months we could see a slowdown in India. It is not a recession, but growth slowdown risk is definitely more elevated from the medium-term perspective, i.e, in the next 12-18 months,” Varma said. Nomura is expecting retail headline inflation in India to stay above the mandated target of 2-6% for the most part of FY23. “The trade-off for the RBI is only going to get more complicated and faster tightening from Fed is negative on the external sector but even on the domestic front, tightening tends to be bad for investment-related growth,” Varma said.
Impact on corporate India
The current geopolitical conditions and the resultant spike in commodity prices could impact profitability of corporates, imparting some caution in the private sector capital expenditure and investment plans in the medium-term, ratings agency Icra said on Thursday. This means that capex plans of central and state governments will continue to be crucial. In such a scenario, government capex, especially by states, will be critical to support investment demand and boost economic activity over the next two-three quarters.
A challenge for corporate India could emerge on the demand side – High inflation in essential items could prompt reduced spending as people reassess their wants and spending patterns. The impending rate hike from RBI, geo-political conflicts and inflation uncertainty is expected to negatively impact demand starting Q3 of this fiscal. Currently, companies have been able to push commodity/ raw material price increases to the consumer through increased prices, which may not work in a diluted demand scenario leading to margin pressures. Combine this with the cascading effect impending rate hikes will have on cost of funds, most businesses are going to see a pressure on margins going forward. However, companies with pricing power, deep penetration and wide distribution network may still be in a better position to fight inflation woes.
The Life Insurance Corporation (LIC) will list its shares on stock exchanges on May 17, roughly a week after its initial public offering (IPO) closes on May 9. The IPO is set to start on May 2 for anchor investors, with subscriptions opening on May 4 and closing on May 9. The proposed IPO has received interests from more than 25 anchor investors both foreign and domestic, 50% of the offer is reserved for QIPs, including anchor investors. 35% is reserved for retail investors, 15 % for high networth individuals and 10%for policyholders. The government plans to dilute 3.5% of its stake in LIC to raise Rs 21,000 crore from the market.
RBI guidelines on key management compensation in NBFCs
The Reserve Bank of India has recommended that non-banking finance companies (NBFCs) form a nomination and remuneration committee (NRC), as it seeks to rationalise compensation of key managerial personnel. The regulator also suggested that non-bank entities do not offer any guaranteed bonus to senior management people. The proportion of variable pay in total compensation, according to the RBI, needs to be commensurate with the role and prudent risk-taking profile of key senior management.
Regulator tightens oversight on NBFC “Third Party Lending” / Onward Lending
The ministry of corporate Affairs (MCA) had tightened the rules for company audits last year mandating companies to provide a new declaration saying they have not lent money to an intermediary with an understanding that the intermediary will in turn loan, or fund, it to a third company. The development assumes significance as several cases have come to light in the last few years where the promoters of NBFCs have diverted funds of the lender to private entities who in turn moved this money into third party companies.
