New Delhi: Fiscal and monetary measures announced by the government are unlikely to change the growth outlook, analysts said on Monday, expecting the Reserve Bank of India to cut policy rates by at least 50 basis points at the monetary policy review meeting on January 27. “While we welcome the counter-cyclical measures as a timely boost to confidence, we do not think that they will materially change the growth outlook,” Goldman Sachs said in an Asia Policy Watch report.
Goldman Sachs said Indias economy was likely to expand by 6.7% in the current fiscal and 5.8% in 2009-10. Gross Domestic Product grew at 9% at in the previous fiscal. JP Morgan said the RBI could cut its policy rates by 50 basis points on January 27 and by another 100 basis points by April.
As the rate cuts, the increased regulatory forbearance, the higher FII limits on corporate bonds, and the sector-specific fiscal measures were broadly anticipated; these steps do not change our view on growth, said JP Morgan analysts Jahangir Aziz and Gunjan Gulati.
Macquarie Research expected the central bank to cut key rates by another 100 basis points in the current quarter and by another cut of the same quantum in the April-June quarter. Political uncertainty in the run-up to the general elections will also prompt government to favour further monetary easing over big-bang fiscal spending, Macquarie Securities economist Rajeev Malik said in a report.
The fiscal measures will likely have only a limited positive impact on the sharp deceleration in the economic growth, it said. Noting that RBI has since October reduced key policy rates several times, Goldman Sachs said, “We believe the central bank will cut the repo and reverse repo rates by another 50 basis points in January to bring the corridor to 3.5-5%.” As regards the cash reverse ratio, the slice of deposits banks need to keep with the RBI, the central bank could reduce the ratio by another 150 basis points to inject more liquidity into the system, it added.
Since October, RBI has reduced the repo rate by 3.5%, reverse repo by 2% and CRR by 4%.
The report said in the coming weeks, the banks could lower lending and deposit rates as a result of the easing money policy being followed by RBI.
“The fiscal and monetary measures announced will be positive for banks, NBFCs, and infrastructure companies, and limit further downside to growth,” the report said.
In order to reverse the economic slowdown, the government on last Friday came up with a second stimulus package, while RBI announced cuts in key policy rates and ratios to ease liquidity situation. Goldman Sachs said inflation is on a downward trajectory and going forward it will continue to fall. “The risks are clearly towards even more aggressive cuts as growth continues to falter, and inflation decline rapidly,” it said.
Going forward, it added, the government should focus on removing supply side constraints and more forcefully implementing the pre-announced spending plans, especially in infrastructure projects.
