Bank recapitalisation to lift GDP growth to 8% next fiscal: Goldman Sachs

The economy is likely to clip at 8 per cent next fiscal as the massive bank recapitalisation will help revive the long-stalled credit demand and private investments, says a brokerage report.

According to Wall Street brokerage Goldman Sachs, the Rs 2.11-trillion bank recapitalisation announced by government last month and a likely recovery in earnings are also likely to drive up the stock markets and has set the Nifty target of 11,600 by next December.

"We project above-consensus real GDP growth of 8 per cent in 2018-19, while we see a growth of 6.4 per cent for 2017-18, as the negative impact from shocks (demonetisation and GST implementation) this year fade and the bank recap programme unlocks credit and private investment growth," it said today.

It said CPI inflation is likely to rise above the mid-point of RBI target to 5.3 per cent in FY19 due to a pick-up in food and commodity prices, and so it expects RBI to hike policy rates by 75 basis points by mid-2019.

Keeping a "overweight" view on the stock markets, Goldman Sachs chief Asia Pacific regional equity strategist Timothy Moe told reporters that, "Nifty is estimated to hit 11,600 by December 2018 from the current levels with earnings growth to be the key propellant".

He also said the market is likely to generate 18 per cent returns in 2018 helped by the recently announced bank reforms. However, he cautioned that any delay in earnings growth can pose downside risks to this outlook.

Economic activity could pick up in first half of 2018, said the report "as the drag from the idiosyncratic shocks of demonetisation and GST implementation fade".

"Four months into GST, our channel checks suggest that there are still some headwinds to activity due to uncertainties around the new tax system and an increased compliance burden," it added.

However, it further noted that its discussions with retailers, wholesalers and manufacturers show that recent government announcements to ease compliance burden and reduced tax rates for nearly 200 products can boost activity over the next three to six months.

On the impact of the bank fund infusion, the report said it expects positive effects from the public sector bank recapitalisation to flow through the economy form the second half of 2018.

"The bank recapitaliation can break the vicious cycle between higher non-performing loans, weaker bank balance sheets and slower credit growth that has inhibited the acceleration in the growth cycle over the past few years," the report said, adding this can also lower borrowing costs further due to competition.