HSBC has downgraded India's economic growth forecast to 5.7 percent in the fiscal year 2019-2020 and 6.4 percent in the FY21 after the nation's first-quarter GDP growth slumped to 5 percent. Pranjul Bhandari, HSBC's chief India economist, said the situation has not really changed in the first two months of the second quarter since last quarter.

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“When we look at July and August, the next 2 months of the new quarter, things are not vastly improved; there are some improvements in services so Purchasing Managers’ Index (PMI) services is up, bank credit for personal loans is up, some government spending has picked up,” she said.

“However, there is a lot of stuff which is not picking up; PMI manufacturing has come in lower, PMI core prices are lower, banks loans to industrial credit is lower. So we are not seeing much improvement and if you factor all of this in, it will be tough to see growth to be much higher than 5.7 percent in FY20 and that’s why we had to bring it down,” Bhandari added.

In such a scenario, Bhandari said, “We still think that there will be some recovery next year. It will be a bit softer than some people are expecting but it is important to note that we are expecting 70 bps recovery next year; GDP going from 5.7 percent to 6.4 percent.”

Talking about rate cut, she said, “We have seen 110 bps of repo rate cuts and we are expecting 50 bps more over the next couple of month. So that will make it a pretty hefty cycle and the terminal repo rate will be sub-5 percent and we think it will also be sustainable.”

HSBC expects a recovery in FY21, with growth going up by 70 bps led by the banking sector. "We do think India’s banks and bank credit is going to lead the recovery because they are coming out of cleanup; NPLs are falling and that makes it easier for them a lot of the policy action has been directed towards them; rate cuts, banking sector liquidity, fast-tracking of bank recap bonds etc., so we do think that lending from banks is going to support recovery next year,” she further added.

Bhandari also expects the Reserve Bank of India to cut interest rates by another 50 basis points on the back of a 110 bps cut so far. She added that the growth dividend of the rate cut is yet to be seen.

First Published:Sept 12, 2019 12:29 PM IST