Q2 GDP and Core Sector Data May Push RBI to Cut Rates in December, Say Economists

Economic data release post market hours on Friday hints that the slowdown has manifested deeper into the system. Economic growth slowed further in the second quarter of this fiscal to hit a 26-month low of 4.5% – a far cry from the 7.1% reported in the corresponding period of the last financial year.

Meanwhile, the output of eight core infrastructure industries contracted by 5.8% in October, according to the government data released on Friday. As many as six of the eight core industries saw a contraction in output in October. The eight-core sectors had expanded by 4.8% in October 2018.

Here’s how leading economists and market watchers have interpreted the numbers released today:

Aditi Nayar, principal economist, ICRA

Based on the unfavourable performance of the core sector, the contraction in the IIP appears set to deepen in October 2019, even as other indicators of demand such as petrol and ATF consumption have recorded an improved performance in that month.

Rainfall related bottlenecks to construction activities contributed to the YoY decline in output of cement and steel in October 2019. Focus on expediting infrastructure projects, measures to aid real estate developers and proposals to address the stress in the NBFC sector may support a pickup in construction activities in the coming months. This should support an improvement in the growth of core items such as steel and cement in the remainder of FY20.

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Dr. Joseph Thomas, head of research, Emkay Wealth Management

Q2 GDP at 4.50% indicates a slump in economic activity and it has become quite pronounced after a slip to 5% in Q1. This leads up to an annual growth rate of close to 5%. A stronger fiscal stimulus is required to stem this fall. Failing this would growth could slip lower as we move into the next financial year.

Rajni Thakur, economist, RBL Bank

At 6.1%, nominal GDP growth is the lowest we have seen in the last few years, except for the quarter ending March 2009. It not only confirms the growth fears in the markets but also lowers the outlook for the full year further.

Growth in the second half of the year could remain evasive unless government pumps in more stimulus and continues to heavy-lift growth push through the fiscal year. The grind up is going to be slow and heavily dependent on fiscal support to come out of current growth recession.”

Deepthi Mary Mathew, economist, Geojit Financial Services

The GDP growth rate for Q2FY20 was in line with the market expectation at 4.5%. All indicators ranging from IIP, electricity consumption to core inflation rate were pointing towards the fact that the economy has not entered the revival path. The slowdown in consumption is indeed worrying, as its revival is important for investment to pick up. The Private Final Consumption Expenditure (PFCE) declined to 5% YoY compared to 9.7%. With the growth slipping to 4.5%, it is expected that the Reserve Bank of India (RBI) will go for the next round of rate cut in December.

Sreejith Balasubramanian, economist - fund management, IDFC AMC

Q2 FY20 real GDP of 4.5% y/y was broadly in line with expectations, but nominal GDP growth was much slower at 6.1% (below 8% in Q1 FY20 and 12% in Q2 FY19). Manufacturing growth contracted, while both private consumption and investment stayed weak.

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With the just-released index of eight core industries falling 5.8% y/y in October, bottoming-out of growth could be further down the road and recovery is unlikely to be V-shaped as consumer demand, credit supply and risk appetite remain lacklustre. This and the falling core-CPI should allow the RBI to focus more on growth, while a major fiscal stimulus is hindered by the lack of available household financial savings.

Amar Ambani, senior president and head of research for institutional equities, YES Securities

The GDP growth figure is as per our estimate for Q2 FY20. The stock market has been trending lower in the last couple of trading sessions, in anticipation of poor numbers. While there may be a mildly negative reaction on Monday, it will not change the medium-term trajectory for equities.

For the fiscal year FY20, our real GDP forecast stands at 5.2%, with risks to further downside. After a 135 basis rate cut delivered by the RBI since February 2019, we expect the RBI to cut rates by an additional 25 bps in December, taking the repo rate to 4.90%. Going forward, we believe the fiscal policy will need to play a dominant role in supporting overall growth. The government may choose to mildly deviate from its fiscal deficit target for this year as well as the next fiscal.

The article was originally published on Business Standard. You can read it here. 

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