Global brokerages expect up to 50bps rate cut in April as GDP could slow further

Global brokerage firms expect further moderation in GDP growth rate and a possible cut in interest rate by the Reserve Bank of India (RBI) in its April policy meeting after data released by the Central Statistics Office (CSO) on February 28 showed that the Indian economy grew 6.6 percent in October-December period.

The real GDP growth slowed sharply to a six-quarter low of 6.6 percent on a year-on-year basis in 3QFY19 from 7 percent in 2QFY19. The number is lower than the market consensus of 6.7 percent.

The moderation was in line with an expected slowdown in the second half of the financial year. According to the official statement, GDP growth during 2018-19 is estimated at 7 percent as compared to 7.2 percent in 2017-18.

The government consumption expenditure (GCE) and private consumption expenditure (PCE) grew slowly in 3QFY19, while investments (GCF) continued growing strongly in the quarter.

Global investment bank Nomura in a report said that it observes a divergence of growth drivers in Q3. Much of the slowdown is in the government consumption, as well as agriculture. On the other hand, investment, industry, private services, and net exports continue to support growth.

Nomura expects growth to slow further to 6-6.5 percent in H1CY19, and is of the view that RBI will deliver another 25 bps rate cut in April policy meeting.

Investments grew 10.5 percent in the quarter on account of double-digit growth in the private sector capex, on the other hand, government capex declined sharply. The implied domestic savings declined to 27 percent of GDP in 9MFY19 from 27.5 percent in the year-ago period, data showed.

Credit Suisse in a report said Q3 GDP moderated to 6.6 percent from the downward revised 7 percent in Q2. The two-year CAGR rose marginally to 7.1 percent as the December 2016 quarter had a low base.

The FY19 estimate cut implies that Q4 is estimated to grow at 6.3 percent. It looks like real estate remains under stress though the GST cut should help in FY20. “MPC’s (monetary policy committee) growth and inflation projections now have downside risk, creating room for policy easing,” said the note.

The government revised down its 1HFY19 headline GDP growth forecast to 7.5 percent from 7.6 percent earlier. Revised data for 1HFY19 confirms that while private consumption expenditure grew faster (8.3% now v/s 7.8% earlier), government consumption expenditure (8.7% v/s 10.1%) and gross capital formation (9.7% v/s 10.7%) grew slower than previously estimated has open room for a rate cut.

“Government revised down its full-year FY19 GDP growth projection from 7.2 percent to 7 percent – exactly in line with our forecast. This implies that it expects GDP growth at 6.5 percent in 4QFY19,” Motilal Oswal said in a note.

“We continue believing that a rate cut is highly likely in the April policy meeting. With inflation at 2 percent and growth at sub-7 percent in 2HFY19, the clout for a 50bps cut could rise,” it said.