Singapore-based banking group DBS has cut India's real gross domestic products (GDP) growth forecast to 6.2 per cent for the current financial year (2019-20) 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," the bank said in its report on the Indian economy on Monday.
DBS in the report titled "India: More policy support likely after weak Q2 growth" said that "starker than expected" slowdown in India's GDP lowered the trajectory for the year. The bank, however, expects the trajectory to improve in FY21, with the growth likely to close in on 7 per cent with a 6.8 per cent growth pace.
DBS lowered the growth forecast after India's GDP growth slipped to 6-year low of 5 per cent in April-June quarter (first quarter of FY20) as compared to 5.8 per cent in the previous quarter, due to slump in manufacturing output, weak consumer demand and deceleration in private investment.
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. According to Rao, the latest RBI minutes from the August review saw the committee members accord high priority to limit weakness to growth and to jumpstart transmission.
"We retain our call for another 15-25bps 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," she added.
"We now expect another 15-25bps rate cut in December. Challenging global conditions and a dovish Federal Open Market Committee (FOMC) add to the case for the RBI to take a growth supportive stance."
As per the DBS report, the government may announce more sector specific supportive measures. Fiscal costs will be kept to a minimum. However, if the slowdown seems entrenched, broader stimulus can be expected next year, it said.
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 continue easing as rate cut expectations are set to return, thereby steepening the yield curve, the report said.
On the forex front, the rupee will continue to watch Chinese Yuan Renminbi (CNY) movements and broader US dollar bias, which at this juncture points towards further rupee weakness owing to a weak global environment, the report noted.
Edited by Chitranjan Kumar