Despite the Gross Domestic Product (GDP) for the October–December quarter of the financial year 2019-20 coming in line with expectations at 4.7 per cent, most analysts expect the Reserve Bank of India (RBI) to cut key rates to prop-up growth.
While the data does not talk of the impact of coronavirus and has retained the economic projection in FY20 at 5 per cent in the second advance estimates, analysts expect an impact on India due to raw material shortages likely to disrupt supplies for key industries. The significantly weaker global growth is likely to be a headwind from February for at least three months.
Analysts at Nomura, for instance, expect growth to slow again in the January-March 2020 quarter to 4.5 per cent. While high-frequency indicators have shown some signs of bottoming out on aggregate in January, weakness persists across many sectors, suggesting no material improvement, analysts believe.
“We continue to expect a 25 bps rate repo cut in Q2 with a chance that this could be delivered as early as April. While the RBI has gone down the unconventional route to enable faster transmission, we remain skeptical that more liquidity will lead to higher credit growth. As such, we expect the RBI to follow up with more LTROs in the coming quarters, possibly opting for a more targeted programme in the future,” wrote Sonal Varma, Managing Director, and Chief India Economist at Nomura in a co-authored report with Aurodeep Nandi.
ICRA, too, supports this argument and expects the RBI to slash rates going ahead. Albeit, they expect the central bank to do so once the inflation is under check.
“The continued slowdown in economic growth in Q3 FY20 suggests that the Monetary Policy Committee (MPC) may well undertake another rate cut, but only when the CPI inflation retraces considerably towards the 4 per cent mark,” said Aditi Nayar, principal economist at ICRA.
“With fiscal policy facing limited space, monetary policy will continue to heavy lift. As inflation eases and heads to the 4 per cent midpoint of the target, markets will price in cuts in the second half of 2020. Whether this cooling off in inflation opens the door for rate cuts will also hinge on growth prospects,” suggests Radhika Rao, senior vice-president, economist (Group Research) at DBS Bank.
Meanwhile, the core sector data growth of 2.2 per cent in the right core sectors of the economy in January 2020 does not lend much confidence. During the April-January period, core industries growth in fact slowed down to 0.6 per cent against 4.4 per cent in the year-ago period.
“The continued contraction in the manufacturing sector is a cause for concern. With the government spending likely to be constrained in the fourth quarter due to constraints on fiscal space and in the absence of strong green shoots, we expect not much improvement in the fourth quarter of 2019-20. Hopefully, this subdued performance will push some policy action from the government to accelerate growth in the economy in the coming fiscal, though the recovery is not likely to be strong,” said Dr. M Govinda Rao, Chief Economic Advisor at Brickwork Ratings.