Singapore's banking group DBS has revised India's real GDP growth forecast downwards for the current financial year to 6.2 per cent from 6.8 per cent projected earlier.
"Factoring in a weak start to FY20 (June quarter was the first quarter), a return to favourable base effects in 2HFY20, and likelihood of growth returning above 6.5 per cent towards end of the year, we revise down our real GDP growth forecast to 6.2 per cent YoY vs 6.8 per cent previously," said the bank in its report on Monday.
The resultant negative output gap will keep inflationary pressures in check. Expecting the trajectory to improve in FY21, the growth is likely to close in on 7 per cent with a 6.8 per cent growth pace, said DBS in the report titled "India: More policy support likely after weak Q2 growth".
For monetary policy, limited fiscal implications from the latest fiscal measures keep the door open for further easing, said Radhika Rao, economist at DBS Group Research.
"We retain our call for another 15-25 bps cut at the October meeting on the back of a weak 2Q GDP outcome. Odds of further rate cuts are rising as a preference to preserve policy space might be overridden by growth concerns.
"We now expect another 15-25 bps rate cut in December. Challenging global conditions and a dovish FOMC add to the case for the RBI to take a growth supportive stance," Rao said.
More sector specific supportive measures from the government are expected. Fiscal costs will be kept to a minimum. However, if the slowdown seems entrenched, broader stimulus can be expected next year, said the report.
For the markets, worries over fiscal support and new 10-year issuance will put pressure on old 10-year prices.
Rest of the curve is likely to ease as rate cut expectations are set to return, thereby steepening the yield curve.
The rupee will continue to watch CNY (Chinese Yuan Renminbi) movements and broader US dollar bias, which at this juncture points towards further rupee weakness owing to a weak global environment, according to the report.
Real GDP slowed to 5 per cent year-on-year in 2Q (first quarter of FY20) from the first quarter's 5.8 per cent, below DBS' sub-consensus and market expectations.