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SBI cuts India's GDP growth forecast to 4.2% for Q2, 5% for FY20

State Bank of India, the country's largest lender, has predicted that India's Gross Domestic Product (GDP) growth may slip to a record low of 4.2 per cent in the second quarter amid low automobile sales, deceleration in air traffic movements, flattening of core sector growth and declining investment in construction and infrastructure. India GDP growth has already hit a 6-year low of 5 per cent during June quarter of this fiscal (Q1FY20).

"Based on our composite leading indicator suggests GDP growth to slowdown further from 5 per cent in Q1 of FY20 to 4.2 per cent on account of low automobile sales, deceleration in air traffic movements, flattening of core sector growth and declining investment in construction and infrastructure," according to SBI Ecowrap report.

The SBI report said that 33 high frequency leading indicators revealed an acceleration rate which was 65 per cent in Q1FY19 declined sharply to 27 per cent in Q2FY20.

The lender has also cut GDP forecast for FY20 to 5 per cent from 6.1 per cent earlier, but expects growth rate to pick up pace in FY21 to 6.2 per cent.

"We however believe this growth rate in FY20 should be looked through the prism of synchronised global slowdown (countries have witnessed 22-716 basis point decline between June'18 and Jun'19, and India cannot be isolated). India is also significantly lower in Economic Uncertainty Index when compared globally," the report noted.

"The contemporary issue for macroeconomists is to focus on assuring adequate aggregate demand and the role of fiscal policy in this context is of paramount importance..In essence, markets are not unduly worried about fiscal deficit and await clarity from Government on the extent of fiscal slippage in current fiscal. Such an announcement could in fact be good for the markets," the report said.

Referring to recent change in Moody's outlook for India's sovereign rating (Baa2) to negative from stable, the report said that it 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".

On Friday, Moody's Investors Service had lowered India's credit rating outlook to negative, citing a prolonged slowdown in the economy.

Apart of SBI, many other agencies - Reserve Bank of India (RBI), the International Monetary Fund (IMF), the Asian Development Bank, World Bank, Organisation for Economic Co-operation and Development (OCED) - have forecasted decline in India's economic growth rates this fiscal.

The report came a day after industrial output fell for the second straight month in September to 4.3 per cent, lowest in the series that began April 2012, due to poor show across all sectors. The Index of Industrial Production (IIP) had declined by 1.1 per cent in August 2019, the government data showed on Monday.

On rate cut, the agency expects a larger rate cuts from Reserve Bank of India (RBI) in December policy, adding that it will not lead to any immediate material revival. "However such rate cut is 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 countries and India cannot be an exception," it said.

"There is a perception in the market domain that de-risking the financial system has brought down the money multiplier in recent period, and that has purely to do with a slow growth in money supply in recent times," the report noted, adding that it is not entirely correct. The creation of money supply is largely endogenous in Indian context, catering purely to low money demand, it.

"Our research shows that the increase in digital transactions post 2016 also played a critical role in the decline in money multiplier, which has changed the composition of financial saving of households away from currency to some extent. In particular, there has been a substitution from currency and much of it has gravitated towards digital mode of payments," the report said.

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