BofAML Cuts India GDP Growth Forecast To 5.8% In 2019-20
RBI will cut the repo rate by 15 basis points in February, over the 0.25 basis point cut expected in December, BofAML says.
Bank of America Merrill Lynch has cut its India GDP growth forecast by 30 basis points to 5.8 percent, citing muted demand during the festive season despite reforms undertaken by the Narendra Modi government.
The Reserve Bank of India will cut its benchmark repo rate by 15 basis points in the February monetary policy review, over the 0.25 percentage point rate cut expected at the December meeting, BofAML said on Monday.
India's gross domestic product expanded at its slowest pace in six years in the April-June quarter of 2019-20 and further weakness is expected in the September quarter. Lack of consumption is seen as one of the key factors for the continued slowdown.
The government and the RBI have been in tandem introducing pro-growth policies to revive growth. The central bank has cut its real GDP growth forecast to 6.1 percent for 2019-20.
"The bad news is that still-high real lending rates and relatively muted Diwali demand has led us to formalise a 30-basis-points cut to our FY20 GVA (gross value added) growth forecast to 5.8 percent," BofAML analysts said, adding that repo rate cuts are the only way out of the present slowdown.
The only good news, they said, is RBI’s recent interventions in the forex market which has created durable liquidity in the system.
BofAML also sees India breaching its fiscal deficit target by 0.5 percentage points, accounting for a 0.8-percentage-point impact of the corporate tax cuts. The government had in Union Budget 2019-20 set itself a fiscal deficit target of 3.3 percent of the GDP; by September, it had covered 92.6 percent of it.
But the brokerage believes the government can ease its fiscal stress by focusing not just on privatisation of public sector undertakings. Higher bond buybacks by RBI and taking onboard the Rs 53,000 crore surplus capital from the central bank can be considered.
RBI may also look at a cut in cash reserve ratio, or the amount banks park with the regulator for borrowings, to boost liquidity in the event of lower foreign inflows.