Risk Aversion Of Banks, Households Making Recovery Difficult, Says JPMorgan’s Sajjid Chinoy

A sentiment of “gloom and doom” has made key economic participants risk averse and this could prolong a recovery for the Indian economy from the lowest quarterly growth seen in nearly six years, according to JPMorgan’s Chief India Economist Sajjid Chinoy.

“When you are in the midst of a three-four quarter slowdown and sentiment turns adverse, all economic agents—whether it is households, firms, financial intermediaries—turn to become more risk averse,” he told BloombergQuint in an interview on the sidelines of the JPMorgan Investor Summit in Mumbai.

Soured sentiment for households and banks particularly is impacting consumption and leading to weaker credit flow to the economy, he said, cautioning that the recovery from this phase may be slow.

“A lot of household consumption has been financed either by running down savings or by taking on debt. When you go through that process, every time you go through a shock and the shock sustains long enough, households can re-calibrate consumption to future income expectations,” he said.

Chinoy joins a growing list of analysts who believe that one part of the slowdown in weaker growth in incomes and savings. Sajeev Prasad of Kotak Institutional Equities had earlier argued that part of the reason for weaker consumption is that the debt-driven consumption binge of the last few years is slowing and consumers are choosing to replenish their savings.

It is not just consumers that are risk averse, lenders also continue to be cautious. After a brief pick-up, credit growth has slipped to just over 10 percent from 14 percent in April. This, despite the fact that liquidity has eased and the government has provided capital to public sector lenders to increase the flow of credit through the economy.

Banks are being careful not to take any “undue credit risk” as they are fresh out of a “bruising” bad loan cycle, Chinoy said. “I think that’s what explains the weak transmission of RBI rate cuts, apart from the technical issues.”

In an effort to boost the economy’s growth which reduced to 5 percent in the first quarter of financial year 2019-20, the monetary policy committee has cut the benchmark interest rate by 110 points in 2019. The transmission of these rate cuts to lending rates of commercial banks, however, has remained slow. Earlier this month, the Finance Ministry made it mandatory to link lending rates to an external benchmark such as the Reserve Bank of India’s repo rate.

Despite the prevailing mood of caution, sentiment can reverse quickly, Chinoy said. “We have seen in the past when things are driven by sentiment, it is possible to bounce back quickly.”

Watch the full interview on what Sajjid Chinoy has to say about a possible fiscal stimulus, the measures already taken and what he expects from the RBI in the next bi-monthly policy.