(Photo: Ramesh Pathania/Mint)
(Photo: Ramesh Pathania/Mint)

Due to dismal GDP, RBI may cut repo rate by 40 bps: Kotak Equities report

  • Kotak Equities said it sees the RBI cutting its key interest rate by 40 basis points in the central bank's October monetary policy review
  • Kotak Equities also reduced India's estimated GDP growth rate to 5.8% for the current fiscal, from its earlier estimate of 6.3%

Mumbai: Noting the gloomy start to the current fiscal with a dismal 5% growth in the first quarter, broking house Kotak Equities on Tuesday also cut down India's 2019-20 GDP growth estimate to 5.8% and said it sees the RBI cutting its key interest rate by 40 basis points (bps) in the central bank's October monetary policy review.

"On the policy front, after the dismal 1QFY20 growth performance and expectations of benign inflation, the monitory policy committee (MPC) will likely have space to cut rates by up to 75 bps through the rest of FY2020, with a cut of around 40 bps likely in the October MPC meeting itself", a Kotak research note said.

At its previous policy review in August, the MPC cut the Reserve Bank of India (RBI) repo, or short-term lending rate for commercial banks, by an unconventional 35 bps to support growth.

Kotak also further reduced India's estimated GDP growth rate to 5.8% for the current fiscal, from its earlier estimate of 6.3%.

"GDP growth in 1QFY20 decelerated sharply to 5% on the back of weakness in private consumption and investment. With a deeper-than-estimated trough and lack of significant impetus to the growth drivers in the near term, we further revise down our FY2020 GDP growth estimate by 50 bps to 5.8%", it said.

"We believe that growth will likely recover on the back of favourable base effects in 2QFY20, and pickup in the pace of Central government spending post elections. The surplus dividend of around 1.76 trillion from the RBI will further aid the government in spending immediately," it said.

"Construction could see some uptick as the government refocuses on capex. We note that our GDP growth estimate of 5.8% is much lower than the RBI's estimate of 6.9%, which would likely be revised down in the October policy," the report added.

On the production side, the report said there is near-stagnant manufacturing sector growth. Real GDP growth slumped to a multi-year low owing to sluggish demand.

Manufacturing growth in the first quarter (Q1) slumped to 0.6% (3.1% in 4Q FY19) consistent with the trend witnessed in the activity indicators.

While construction activity slowed to 5.7% (7.1% in 4QFY19) amid limited government spending, the electricity segment expanded by 8.6%.

Within services, financial, real estate, and professional services growth slowed to 5.9%, according to latest official figures.

The report said there has been a sharp drop in private consumption and investment growth. Private consumption growth plummeted to 3.1% (7.2% in 4QFY19).

While rural consumption has been weak owing to near stagnant farm income growth, urban consumption has been under pressure owing to a trough in savings rate, worsening financing conditions and fading out of government salary adjustments.

Government expenditure growth in Q1 also slowed to 8.8% (13.1% in 4QFY19) primarily due to slower pace of expenditure during elections.

Investment growth remained sluggish at 4% owing to election-related uncertainty and decline in government capex. Global growth and trade headwinds were visible in export growth slowing to 5.7% (10.6% in 4QFY19).

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