Rate cuts, lower oil prices to boost consumption: Report

Mumbai :Bank of America Merill Lynch today said it sees a recovery in consumption equivalent to 1 percentage point of India’s GDP in the next few months on lending rate cuts, expected hike in salaries by government and savings from lower oil prices.

“We see a consumption recovery of over 1 per cent of GDP in the coming months,” the foreign brokerage said in a note here.

The expectation is largely driven by the continuing interest rate cuts (banks have cut rates by 0.30 per cent in last few months), a likely hike in government salaries as per the revised guidelines (up to 0.5 per cent of GDP), savings of 0.4 per cent of GDP from lower oil prices and a boost in rural demand on the back of a hike in support prices, it said.

Over the next three years, there will be a USD 100 billion boost to discretionary spends due to aforementioned factors, which is 40 per cent of the total USD 230 billion spending of 2014-15, the note said.

On rates, the brokerage said discretionary spends generally react to actions in up to two quarters and cited the case of motor vehicles, saying one percentage point cut in call money market rates can result in a 3 per cent growth in sales of two wheeler and passenger vehicles, 6 per cent in the LCV segment and 9.5 per cent in commercial vehicles, over two years.

Lower oil prices are accruing in savings on the household front, which will ultimately gets diverted to consumption, the leading brokerage said.

A surge in consumption, especially in rural India, was a big contributor which led to the recovery in the post-2008 financial crisis years.