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Expect FY20 GDP growth below 5%, RBI likely to cut repo rate by 25 bps in Dec policy: Experts

December 03
01:29 2019

India’s economy registered a growth of 4.5 percent for the quarter ended in September, the lowest in the last 26 quarters, from 5 percent in Q1FY20 and 7 percent in Q2FY19 due to low growth in investment.

The Q2 GDP growth was in line with analyst estimates. The Gross Value Added (GVA), which is the GDP minus taxes and is seen as a more realistic gauge to measure economic activity, weakened to a record low of 4.3 percent YoY in Q2FY20 against 4.9 percent growth in Q1FY20 and 6.9 percent in the same period in 2018 on account of the weakness in industrial activity.

The nominal GDP growth stood at 6.3 percent for the quarter, the lowest since Q4FY09.

The weakness in real GDP growth was entirely driven by investment as consumption increased during the quarter led by both private and government consumption. Notably, external trades fared well in Q2FY20 as the decline in imports was much steeper than exports.

As a result, analysts do not expect major growth in the third quarter of financial year 2019-20 and lowered their full year forecast to below 5 percent.

“Nevertheless, we believe that the expectation of better growth in Q3FY20 may not pan out as leading indicators suggest that October 2019 – a festive month – was the worst in the current cycle. Therefore, growth could weaken further to around 4 percent in Q3FY20, which will mark a trough. For FY20, we cut our growth forecast from 5.7 percent earlier to around 4.5 percent,” Motilal Oswal said.

Kotak Institutional Equities also revised down its FY20 GDP growth forecast by 30 bps to 4.7 percent. “We see limited room for a meaningful revival in activity in the months ahead,” it said.

The industrial activity growth came in at a mere 0.5 percent, lower than the 2.7 percent in Q1FY20 and the 6.7 percent in Q2FY19. Manufacturing, which accounts for almost three-fourths of the industrial activity, contracted 1 percent in Q2FY20 versus growth of 0.6 percent in the previous quarter.

Gross capital formation (GCF) grew at 0.5 percent YoY versus 3.7 percent a quarter ago and 11 percent in the year-ago period.

The consumption growth accelerated to 6.9 percent YoY from 4.1 percent a quarter ago. The private consumption growth picked up to 5.1 percent from 3.1 percent in the prior quarter while the government consumption grew at a six-quarter high of 15.6 percent against 8.8 percent last quarter.

“While a weak GDP print was expected, slowdown in nominal GDP was striking. As per our forecast, real GDP growth will likely average about 5.2 percent in the second half of FY20,” said Deutsche Bank which expected the nominal GDP growth to be only 8 percent in FY20 and the GDP growth at 6.2 percent YoY for FY21.

Japanese brokerage firm Nomura expects the growth to remain subdued at 4.7 percent YoY in Q4FY20 and to average 4.9 percent in FY20. “We expect focus to shift to government measures on specific sectors and revitalise financial sector,” it said.

Considering subdued growth for the entire year, brokerages expect the Reserve Bank of India (RBI) to cut the repo rate by another 25 bps on December 5 when it announced the monetary policy.

According to them, the RBI may keep its accommodative stance and may see another 25 bps by March 2020.

Kotak reiterated its call of another 50 bps of repo rate cuts through rest of FY20.

“The Monetary Policy Committee now will likely prioritize growth slowdown over high inflation, and thus might cut the rate by another 25bp in its next meeting on December 5,” said Motilal Oswal.

HSBC and Nomura also expect a 25 bps repo rate cut. “We do not rule out the possibility of a larger cut of 35 bps on Thursday,” Deutsche Bank said.

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