The Q4 GDP data validates that the growth trajectory is weaker than expected. Simultaneously, the global economy has also weakened sharply post Mar 2012. Domestically, monetary conditions remain overly tight (despite 50bps rate cut) and will continue to fetter the economy in coming quarters. Further, EL Nino conditions are likely to impact Aug-Sept rainfall and agri-output. Hence, we revise FY13 GDP growth to 6.4%.
We contend that going ahead, elevated interest rates would prove counter-productive, impeding fiscal consolidation (by hurting growth and tax revenues), worsening investment downturn and hindering inflation easing (by discouraging capacity creation). Ergo, we now expect RBI to cut repo rate by 75-100bps in rest of FY13. This, along with undervalued INR and easing commodities should aid growth towards late FY13 and in FY14.
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Synchronized economic downturn across the globe
The data from last 2-3 months confirms the slowdown in global economy in a rapid and synchronized fashion. The decline in the growth of global money supply (M1) is very much on the lines of Dec 2008 while the latest BIS data suggests that cross-border loans are being retrenched rapidly, led by EU banks. These trends foreshadow the sizeable weakness in the global economy which will certainly impact growth prospects of Indian economy in the coming quarters.
RBI has overdone the monetary tightening
RBI has kept monetary conditions too tight (despite 50bps cut) for too long, in our view. While the economy has slipped far below its potential, real rates are still at historical highs which will continue to impact the activity for next 2-3 quarters. Indeed, we argue thathigh interest rates are turning counter-productive, impeding fiscal consolidation (via lower tax revenues), worsening investment downturn and hindering inflation easing (by discouraging capacity creation). Accordingly, we expect RBI to support growth by cutting repo rate by 75-100bps in the rest of FY13.
Weaker monsoon to impact agri-output, agri-inflation
Indications from IMD (and other international agencies) are that El Nino conditions will cause lower rainfall in Aug-Sept which will hurt the Kharif output (particularly pulses, oilseeds and cotton) and raise agri prices.
FY13 growth forecast cut to 6.4%; silver lining emerging too
The weaker Q4 GDP print and significant headwinds posed by above-mentioned factors mean that growth trajectory in the coming 2-3 quarters will be weaker than expected. Ergo, we cut our FY13 growth forecast to 6.4% from 7% earlier. However, likely aggressive rate cuts, undervalued INR and easing commodity prices mean that growth trajectory will start to improve in late FY13, with full benefits trickling in FY14.
Regards,
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