BofA-ML trims India's FY14 GDP forecast yet again to 5.8%

Bank of America Merill Lynch (BofA-ML) today lowered India's GDP growth projection yet again, saying the economy will expand at 5.8% during the current fiscal in view of tight liquidity and slow industrial recovery.

The global brokerage has also lowered the growth forecast to 6.8% for the 2014-15 fiscal.

"With tight liquidity delaying lending rate cuts and by extension, industrial recovery, we have marginally pared our growth forecast to 5.8% from 6% earlier in FY14 and 6.8% from 7.2% in FY15," BofA-ML economists said in a note.

The note comes within two days of release of official data confirming that the GDP expansion came in at a 10-year low of 5.025% in 2012-13. The brokerage firm had in March revised the growth estimate down to 6% for 2013-14.

The government's economic survey expects growth to come in between 6.1-6.7% cent for the fiscal, while the Reserve Bank pegged it at 5.7%.

BofA-ML expects a "shallow recovery" in growth only in the second half of the current fiscal and added that lending rate cuts hold the key for the revival.

"Given that neither the global business cycle is likely to turn nor capex set to turn around, recovery will pretty much depend on rains and lending rate cuts," it said.

The report said lending rate cuts have the potential to take the growth to the 6% level and added that we should monitor the rate cuts for recovery.

BofA-ML expects the lending rates to come off by another 0.50-0.75% by next March as deposit grows 15% on the expected CRR cuts and OMOs from the Reserve Bank.

"The resultant improvement in liquidity should soften lending rates to arrest the fall in growth," it said, adding that for the June 17 policy review, it expects a 25 bps cut each in both the CRR and the repo.

Explaining the reasons for the slowdown, BofA-ML said at least 0.75% of the around 3% slowdown in growth can be attributed to the Reserve Bank's elevated rate stance, which came as a result of high inflation.

A major impact of around 1.50% was due to the global downturn, while investment slowdown resulted in 0.50% and poor rains with 0.25%.

On the positive side, it said 80% of the 50 equity investors it met recently are neutral-to-overweight on the country to diversify risk away from China, even though they might be so "reluctantly".