Lower domestic growth worrisome for markets, RBI rate cut fails to cheer

The Reserve Bank of India (RBI)'s decision to cut policy rates by another 25 basis points (bps) in its fourth bi-monthly policy meeting on Friday failed to cheer investors. While the rate cuts were closer to the lower band expectations of 25-40 bps, the markets see the cut in growth estimates as a bigger worry. With a sharp 80 bps cut in FY20 GDP forecast to 6.1 per cent, the BSE Sensex and Nifty 50  fell over one per cent on Friday. Including the combined reduction of 50 bps in previous three occasions, the total cut in FY20 GDP growth estimate is 130 bps. In light of growth worries, investors need to be cautious, say experts.

According to G Chokkalingam, founder of Equinomics Research & Advisory, given the weaker domestic growth due to cyclical and some structural issues, the situation of global slowdown is quite tough for India. Investors should be very selective and stick to high quality stocks in the small- and mid-cap space and defensive sectors such as fast moving consumer goods or IT, he added.

In FY08, FY12 and FY16, global economic growth was under pressure, which also hurt domestic equity returns despite India’s growth remaining decent. Therefore, the pressure on Indian economy this time, with stress in key sectors such as real estate, automobiles, non-banking financial companies, among others, is worrisome.

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.

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