A worker stands on scaffolding as he trowells cement at the construction site of an apartment. (Photographer: Kuni Takahashi/Bloomberg)

SBI Research Sees India’s Q4 GDP Growth Rate At 5.9-6.1%

India’s gross domestic product will expand by 5.9-6.1 percent in January-March 2019, pulling down growth for the entire 2018-19 fiscal year to below 7 percent, a State Bank of India research report said.

The slip in India’s GDP growth rate may force the Reserve Bank of India to go for a deeper 50 basis point rate cut at its monetary policy review meeting on June 6 to propel the Indian economy, said the SBI Ecowrap report released Monday.

The Central Statistics Office is expected to announced Q4 GDP data and growth estimates for the full year on Friday, May 31.

“We expect GDP growth for Q4FY19 at 6.1 percent. GVA (gross value added) growth could be at 6 percent or slip marginally below 6 percent at 5.9 percent. FY19 GDP growth will be at 6.9 percent,” it said. The current slowdown can be “transitory” if proper policies are adopted in the interim, the report stated.

Calling out the high real interest rates—the differential between the policy rate and headline inflation—as an impediment to investment, the SBI Ecowrap report said rate cut of 35-50 basis points is likely at the monetary policy review meeting on June 6.

But the RBI rate cut can be effective only if transmission of the rates happens quickly, SBI said, suggesting a few factors that the central bank needs to keep in mind while delivering a rate cut.

Pointing out to the cumulative RBI rate cuts of 50 basis points since February, the SBI note said the median marginal cost of funds-based lending rate, or MCLR, has moved down by only 0.07 percent.

The first step towards ensuring policy rate transmission will be to ensure adoption of external benchmark rate which moves in with the RBI repo rate.

“Ensure that asset and liability side of the banks move in tandem and ensure repo rate is directly benchmarked to external benchmark/non-volatile bank liabilities/CASA that are mostly used for transaction purposes,” it said. Otherwise, it would continue to be constrained by lack of transmission, even as RBI will continue to cut rates, it said.

The central bank also has to ensure that liquidity is “plentiful” in the system, amid muted government spending and currency leakage due to elections.

“We expect growth rates to stay weak but a combination of strong government policy support and benign monetary policy environment should lead to recovery in growth prospects towards the second half of this fiscal year (FY20),” the report said.