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Business News/ Politics / News/  Potential upsides to 6% estimate
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Potential upsides to 6% estimate

Potential upsides to 6% estimate

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On the flip side, RBI expects growth to slow further to 6% in FY10, significantly below potential. In arriving at the estimate, RBI has considered a bleak outlook for global growth and the possibility that domestic firms may continue to be starved of external financing options. Our base case for FY10 growth is also 6%; however we see potential upsides for this estimate.

A number of positive signals have emerged from the domestic economy of late, as improved financing conditions and buoyant rural incomes have helped companies tap demand for consumer durables. Even on the investment front, although business sentiment is still depressed, targeted stimulus measures have helped boost demand in key sectors. External demand conditions are still weak, but are expected to improve by the fourth quarter of the calendar year along with a likely US recovery.

All considered, we see a 30% chance that growth in the fourth quarter of FY10 exceeds 7% and full-year growth is upwards of 6%. However, the FY10 outlook is clouded by uncertainties such as election results, the possibility of large auto bankruptcies in the US and the roll-out of the US treasury’s public-private investment programme for legacy assets. As a result, the central bank has decided to take out an insurance policy to protect growth from further shocks. The only surprise then was that RBI chose to effect only a quarter percentage point cut. The answer to this lies in RBI’s efforts to improve monetary transmission mechanism. The central bank has been nudging commercial banks to be more proactive in lowering interest rates and by its own admission the cut in policy rates is meant to reinforce the process.

While RBI has the option of cutting rates by a quarter percentage point by July-end, an improvement in growth outlook along the lines of our optimistic scenario may obviate the need for a further cut. Attention may then turn to fashioning an exit policy from rock-bottom policy rates and excess liquidity conditions.

A. Prasanna is chief economist at ICICI Securities Primary Dealership Ltd.

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Published: 22 Apr 2009, 12:45 AM IST
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