DBS Cuts India’s Real GDP Growth Forecast For FY20 To 6.2%

Singapore's banking group DBS has revised India's real gross domestic product growth forecast downwards for the current financial year to 6.2 percent from 6.8 percent projected earlier.

"Factoring in a weak start to FY20 (June quarter was the first quarter), a return to favourable base effects in 2HFY20 (second half of fiscal year 2020), and likelihood of growth returning above 6.5 percent towards end of the year, we revise down our real GDP growth forecast to 6.2 percent year-on-year versus 6.8 percent 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 percent with a 6.8 percent 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 basis points 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 basis points rate cut in December. Challenging global conditions and a dovish Federal Open Market Committee 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 Chinese Yuan Renminbi movements and broader U.S. 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 percent year-on-year in 2Q (first quarter of FY20) from the first quarter's 5.8 percent, below DBS' sub-consensus and market expectations.