New Delhi: The State Bank of India’s research wing on Tuesday sharply slashed the GDP forecast for the full year to a low 5%, and warned of financial instability if the central bank continues with its easy money policy in its bid to spur growth.
The sharp downward revision to the tune of 110 bps comes within a month of its previous projection of 6.1% and within a week of international rating agency Moody’s downgrading the sovereign outlook to negative from stable, citing falling growth and weakening government finances on the back of massive tax giveaways and plunging tax collection.
The note also comes a day after factory output contracted by a full 4.3% in September – the worst in nine years.
The bank’s in-house economists, who work at the lender’s research wing, also said the second quarter GDP growth will come in at a lower 4.2%.
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The SBI research team – whose reports come with a disclaimer that their opinion does not necessarily reflect those of the bank or its subsidiaries – attributed their lower projection to the plunging automobile sales, deceleration in air traffic movements, flattening core sector and declining investment in construction and infrastructure.
GDP expansion hit a six-year low of 5% in the June quarter on concerns surrounding consumption and private investment, and many analysts have cut their growth forecasts.
Japanese brokerage Nomura expects GDP to grow at 4.9% for the year to March, the lowest projection so far.
SBI, which had a forecast of 6.1% in line with the number projected by the Reserve Bank, has cut its forecast to 5% in a sharp cut in outlook and added that the same will go up to 6.2% in FY’ 21.
The slower growth should be looked at in context of a “synchronised global slowdown” and India is also significantly lower in the economic uncertainty index compared to its peers, the report said.
“We now expect larger rate cuts from RBI in the December policy. However, such rate cut is unlikely to lead to any immediate material revival, rather it might result in potential financial instability,” they warned.
It can be noted that the RBI has cut interest rates by a cumulative 135 bps in 2019 in its bid to revive the sagging growth, best utilising the comfort afforded by stability in its core objective of price rise.
The government should now hope for not having “negative policy surprises” on sectors like telecom, shadow banks and power, they said.
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“It is imperative that a lasting solution is worked out for NBFCs which has been much delayed now.We believe given the crisis of confidence in the financial markets, provision of central bank liquidity for NBFCs is necessary to ensure the stability of the financial system,” the report said.
In telecom, the government need to encourage new investors to set up networks by addressing the woes of the incumbents, it said, adding in the power sector, despite a 15% increase in installed capacity, average plant load factor of thermal plants dipped to an all time low of 48.9% in October, while renewables generation declined by 6.4%.