Although Friday’s fall was mainly led by the financial stocks (Nifty Financial Service index fell two per cent) amid profitability concerns given RBI’s focus on transmission of rate cuts, the regulator did highlight factors pointing to sluggish growth in the first half of FY20. For instance, the global economy has lost further momentum since RBI’s August 2019 policy meeting.
Notably, the central bank also highlighted that intensification of global uncertainty around US-China trade tensions, a hard Brexit and geo-political tensions are key downside risks to India’s baseline growth path.
In fact, Naveen Kulkarni, head of research at Reliance Securities is of the view that the (dovish) stance maintained by the RBI
is mindful of the structural slowdown in the economy and the market feels a greater push was needed.
Yes, there is little doubt that last month’s corporate tax rate cuts created euphoria in the markets and for India Inc. However, it led to scepticism of widening fiscal deficit, thereby leading to higher funding costs. RBI
though believes fiscal deficit would remain under control.
The government has made a statement that they will adhere to the fiscal deficit of the current year. So, we have therefore no reason to doubt their commitment, RBI’s governor, Shaktikanta Das, said.
Nonetheless, the bigger worry for now remains revival in economic growth.
Analysts at Edelweiss say that going ahead, they expect Mint Street to take the repo rate to 4.5 per cent (another 65 bps cut) by FY20—India’s lowest policy rate. “We believe this, along with a fiscal stimulus, is the need of the hour to revive the economy, especially given negative growth impulses from the global economy as well,” they say.
While factors such as good monsoon, lower oil prices and improved liquidity and lower corporate tax rates should help, the jury is still out on the speed and timing of recovery in India’s GDP growth and India Inc’s earnings.