India's GDP likely to grow 4.2% in Q2, says SBI research report; cuts FY20 full year growth to 5%

New Delhi: An SBI research report on Tuesday sharply cut the country's GDP growth forecast to 5 percent for FY 2019-20 from the earlier projection of 6.1 percent.

The second-quarter GDP growth rate is likely to slip to 4.2 percent 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 Ecowrap -- the report from the Economic Research Department of State Bank of India (SBI).

The report, however, said the economic growth rate will pick up pace in 2020-21 to 6.2 percent.

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To propel economic growth, it said, the Reserve Bank of India (RBI) may go for "larger rate cuts" in December monetary policy review.

Representational image. Reuters.

Last month, while reducing the key policy rate (repo) by 25 basis points for the fifth time in a row, the RBI had also reduced its growth forecast to 6.1 percent for 2019-20 from 6.9 percent.

Meanwhile, the SBI research report said, "We are revising our GDP forecast for 2019-20 to 5 percent from 6.1 percent earlier."

India's GDP growth had dipped to about a six-year low of 5 percent in the first quarter of the fiscal.

"We expect Q2GDP growth at 4.2 percent. Our acceleration rate for 33 leading indicators at 85 percent in October 2018 is down to just 17 percent in September 2019, with such decline gaining traction from March 2019," the report said, while terming the decline in September IIP by 4.3 percent as "quite alarming".

Ecowrap further said that the growth rate in 2019-20 "should be looked" through the prism of synchronised global slowdown (countries have witnessed 22-716 basis point decline between June 2018 and June 2019, and India cannot be isolated!).

"India is also significantly lower in Economic Uncertainty Index when compared globally!

"We also believe that Moody's change in outlook from stable to negative 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," the report said.

As per the study, the RBI is expected to go in for "larger rate cuts" in December monetary policy review.

The RBI is scheduled to announce its fifth bi-monthly monetary policy for the current fiscal on 5 December.

"We now expect larger rate cuts from RBI in December policy. 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," the report said.

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, it added.

"In essence", markets are not unduly worried about fiscal deficit and await clarity from Government on the extent of fiscal slippage in current fiscal, the report noted.

Such an announcement could in fact be good for the markets, Ecowrap said.

Against growth slowdown, Ecowrap suggested that "it is imperative that India adheres to no negative policy surprises" in sectors like telecom, power and NBFCs.

For example, it is imperative that a lasting solution is worked out for the NBFC sector that has been much delayed now, it said.