SBI, DBS signal growth rate set to dip further

New Delhi: In yet another blow to the Indian economy after Moody’s downgrade, two reports — by the State Bank of India and Singapore’s DBS Bank — on Tuesday raised concerns over the slowdown in economic growth. The SBI research report, signalling a declining trend, sharply cut the country’s gross domestic product (GDP) growth forecast to five per cent for FY 2019-20, down from the earlier projection of six per cent, while DBS Bank said India’s July-September quarter GDP numbers could be crucial.

Terming the decline in September’s industrial output (IIP) growth by 4.3 per cent as “quite alarming”, the report from SBI’s economic research department said: “We expect Q2GDP growth at 4.2 per cent. Our acceleration rate for 33 leading indicators at 85 per cent in October 2018 is down to just 17 per cent in September 2019, with such decline gaining traction from March 2019.”

“On account of low automobile sales, flattening of core sector growth, declining investment in construction as well as infrastructure and deceleration in air traffic movement, the second quarter GDP growth rate is likely to slip to 4.2 per cent,” the SBI report added.

The report further said: “We also believe Moody’s change in outlook from stable to negative will not have any significant impact as rating actions are always a laggard indicator, and the markets this time have categorically given a thumbs down to such.”

However, it added, the growth rate in 2019-20 should be looked through the prism of synchronised global slowdown (countries have seen a 22-716 basis point decline between June 2018 and June 2019, and India cannot be isolated!). “India is also significantly lower in the Economic Uncertainty Index when compared globally,” it said.

Nevertheless, Singapore’s DBS Bank in its daily report on Tuesday also said India’s July-September quarter GDP numbers could be crucial. “India’s July-September quarter GDP data, scheduled for release on November 29, will be important as headline growth has already slipped to a six-year low to five per cent year-on-year in the quarter ending June,” it said.

“A disappointing GDP report could lift $/Rs above its two-month range between 70.5 and 71.5 and bring it closer to the year’s high, around 72.5,” the DBS report said, adding that the Indian rupee depreciated to 71.47 from 71.29 on Monday.

The SBI research report was, however, hopeful that the economic growth rate will pick up pace in 2020-21 to 6.2 per cent. “To propel growth, the Reserve Bank may go for larger rate cuts in its December monetary policy review,” it said.

Against the growth slowdown, the SBI note, however, suggested: “It is imperative that India adheres to no negative policy surprises in sectors like telecom, power and non-banking finance companies (NBFCs). For example, it is also imperative that a lasting solution is worked out for the NBFC sector that has been much delayed now.”

Last month, while reducing the key policy or repo rate by 25 basis points for the fifth time in a row, the RBI also reduced its growth forecast to 6.1 per cent for 2019-20, down from 6.9 per cent. “We are revising our GDP forecast for 2019-20 to five per cent from 6.1 per cent earlier,” the SBI report said.

As per the study, the RBI is likely to go in for larger rate cuts in its December monetary policy review.  The central bank is due to announce its fifth bi-monthly monetary policy on December 5.

“We now expect larger rate cuts from the RBI in its December policy. But such rate cuts are unlikely to lead to any immediate material revival, rather it might result in potential financial instability as debt financed consumption against an increasing household leverage had not worked in other countries, and India cannot be an exception,” it said.