Slowdown in remittances could impact consumption demand further: India Ratings

MUMBAI: Recessionary pressures due to the Covid 19 pandemic and falling oil prices in gulf countries which have led to job losses and salary cuts globally have impacted remittances into India in a more structural manner and could further weaken aggregate consumption demand in the country, rating agency India Ratings and Research (Ind-Ra) said in a note.

Historically, India has been one of the largest receiver of remittances in the world, however, the share of remittances as a percentage of gross disposable income receded to 2.5% in FY19 from 3.5% in FY10, indicating the moderation started even before the outbreak of COVID-19.

Remittances are an important driver of a smooth consumption cycle and countries with large dependence on remittances act as a counter cyclical buffer against a fall in domestic output. Remittances have a positive impact on household savings and act as a consumption booster. “Therefore, the pandemic-led slowdown in consumption is likely to get exacerbated by the muted remittance flows,” the Ind-Ra said.

For India, gulf countries are the largest source of remittances, thus oil price has been recognised as the major driver for quantum of flows. Additionally, geopolitical conditions play critical role.

“India receives its major remittances from GCC (gulf co-operation council) nations which have stagnated since 2015 due to volatile oil prices in global markets. The economic growth of the region depends heavily on oil prices. The remittances from the region will be further pressured due to COVID-19 related factors coupled with falling oil prices,” Ind-Ra which is an arm of global rating agency Fitch in India said.

According to World Bank, Indian diaspora constitutes close to 16 million people around the world, of this, 55% are situated in GCC. Furthermore, the remittances from the region constitute 54% of the total remittances to India. According to the bank, global remittances are projected to decline by 20% yoy in 2020 due to the economic crisis induced by COVID-19 pandemic.

Remittances also buffer against volatilities of capital flows as it is a transfer of income to home destination and hence more of a stable source.

However, NRE deposits have not seen a significant change despite the impact on remittances. NRE account of Federal Bank constitutes 40% of its total deposits whereas 30% of the total deposits of South Indian Bank are dependent upon NRI accounts.

“Both the banks have reported a rise in their NRE accounts and NRI accounts respectively. The major cause behind the heightened deposits, despite falling remittances, are more savings amid COVID-19 crisis along with favourable interest rates. The banks have proved a stable deposit ratio like during the previous crisis such the 2008-2009 global financial crisis. The banks will be able to manage this risk with stable deposit growth coupled with muted credit offtake. However, in case the inflows continue to slacken, increased withdrawals will heighten risks,” Ind-Ra said.

Source link