Ahead of the formal announcement of the annual growth number for 2018-19 (FY19), two research agencies on Monday estimated growth to be at 6.9 per cent, a tad lower than the earlier estimate of 7 per cent. There is widespread believe that the Monetary Policy Committee (MPC) might go for a bigger rate cut next month.

The Government will announce the annual growth number on May 31 while the MPC will meet during June 4-6 and announce its resolution on June 6.

SBI’s Economic Research Division, in its latest edition of Ecowrap, expected GDP (Gross Domestic Product) growth for fourth quarter (Jan-March) of FY19 at 6.1 per cent. It estimated FY19 GDP growth at 6.9 per cent. The good thing is that “we expect that the current slowdown could be transitory, if proper policies are adopted in interregnum. For example, the current high real interest rates are severely acting as an impediment to investment.”

India Ratings & Research (Ind-Ra) expects GDP growth during the fourth quarter to decelerate to 6.3 per cent from 6.6 per cent in the third quarter (October-December). There would be another four-quarter GDP slowdown, starting from 4QFY18. Thus, “Ind-Ra expects FY19 GDP growth to be 6.9 per cent as against the FY19 advance estimate of 7.0 per cent. Growth rate in 2017-18 was 7.2 per cent. The agency further added that FY19 will be the second consecutive year of an economic slowdown in India”.

How to arrest slowdown

SBI’s research report expects a larger rate cut (35-50 basis points) in the forthcoming policy. However, a cut is not sufficient, the transmission is equally important.

Accordingly, the report said the RBI must ensure that asset and liability side of the banks move in tandem. There is also a need to ensure the repo rate is directly benchmarked to external benchmark/non-volatile bank liabilities /CASA that are mostly used for transaction purposes. If these don’t happen, there will be an issue on transmission. It may be noted that since February 7, the RBI has reduced the policy repo rate by 50 bps, while the median rate of all banks’ 1-year MCLR indicate a transmission of only 6 bps.

According to Ind-Ra, the new government will have to devise and execute both short-term and medium-to-long-term measures to arrest the slowdown. While cyclical challenges can be addressed through short-term measures, the need of the hour is to address the structural challenges plaguing the Indian economy. At the macro level, the revival of investment, the resolution of the credit freeze witnessed by the non-banking financial sector and the worsening of the global trade environment are the key challenges.

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