A worker looks down from a house under construction in Leh, Jammu and Kashmir, India (Photographer: Prashanth Vishwanathan/Bloomberg)  

Growth Glum, Rate Cut To Come, Says Nomura 

A slowdown in the Indian economy, which has been mostly cyclical so far, is starting to seep through into segments beyond consumption, said Nomura Global Market Research in a report on Tuesday.

The Nomura Composite Leading Index, a weighted average of seven leading indicators of non- agricultural GDP growth, fell to 99.9 in the first quarter of 2019 from 100.1 in the fourth quarter of 2018.

The decline could imply a fall in GDP growth in the December-ended quarter to 6.6 percent from 7.1 percent in the previous quarter, said Nomura. Growth could further slow to between 6-6.5 percent in the first half of 2019, it added.

Official data from GDP growth in the October-December quarter is expected on Feb.28.

Is The Slowdown Spreading?

A wider array of consumption indicators have started to suggest a slowdown. This includes sharp declines in domestic passenger vehicle sales, diesel consumption, cellular subscribers and the paring of consumer credit. On the rural side, a slowdown in two wheeler sales has been observed.

Nomura added that the services sector is also feeling the heat. Given that some of these services can serve as leading indicators of the industrial cycle, the brokerage house sees a risk that this sluggishness could spread to the industrial sector.

While the financial sector remains strong, this could be because of a substitution effect due to the liquidity crunch faced bu non-bank lenders.

Financial sector (deposit and credit growth) indicators are showing strong growth, although we suspect the shadow banking crisis is contributing to the momentum – either via personal credit substitution away from shadow banks or with banks increasingly financing cash-strapped shadow banks.
Sonal Varma, Chief India Economist, Nomura Global Market Research

More Rate Cuts?

With growth softening and inflation remaining below estimates, the Monetary Policy Committee could consider another interest rate cut, Nomura said.

The research house expects growth to disappoint RBI forecasts and inflation to remain below 4 percent. This could mean another rate cut in April, it said while adding that there is a 20 percent probability of a rate cut beyond April as well.

“The RBI’s focus on headline inflation and its indication that policy will focus on boosting growth suggests the February rate cut was not a “one and done,” Varma wrote.