The Reserve Bank of India (RBI) could cut repo rate by 25 basis points (bps) in the August 7 policy meet and further reduce it by 50-75 bps to achieve the level of less than or equal to 5 per cent by March 2020, according to State Bank of India's research report ‘Ecowrap’.

The report, however, foresees significant volatility in G-Sec yields that could first rise precipitously (even 6.5-6.6 per cent is not ruled out) and then decline precipitously (below 6 per cent), reflecting global headwinds.

“Banks will cut deposit rates further and lending rates will witness a faster incremental fall in coming months. This could aid recovery, but it is unlikely before late Q3FY20.”

“A delayed festive season this fiscal is not going to help either! In our sense, a sector-specific policy intervention is now a must. Finally, we must find a genuine solution to the long delays at NCLTs (National Company Law Tribunals),” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

The report expects GDP growth to fall to 5.6 per cent in Q1 FY20 from 5.8 per cent in Q4 of FY19.

SBI's Composite Leading Indicator (CLI), which is a basket of 33 major leading indicators, is showing a flattening trend in Q1FY20. The percentage of indicators showing acceleration has now come down from 45 per cent in Q4 of FY20 to a mere 26 per cent in June.

“Market sentiments are also weak, with ₹15 lakh crore decline in market capitalization since July. In the current FY so far (upto 19 Jul’19), the ASCBs (all scheduled commercial banks) credit on YoY is at 12.1 per cent compared to last year growth of 12.4 per cent. However, on a q-o-q basis, corporate advances across banks show a muted to negative growth. Retail advances remain positive, though a persistent demand slowdown is already pulling back things (as clearly evident in June)," said Ghosh.

Heightened uncertainty

The report said that the bond markets are giving signs of heightened uncertainty. The spread between Indian 10 year and 1 year papers has been narrowing considerably this fiscal. This is indicative of weakening sentiments and an impending slowdown, the report added. On the other hand, the spread between the 30 year paper and 10 year paper has widened till July 2019. The corporate bond spread has widened across maturities.

“Q1 FY20 indirect tap collections have registered de-growth. While expenditure growth has been largely contained, capital expenditure seems to be the casualty. Such a cutback will surely act as growth dampener.”

“Rainfall, though has picked-up significant pace, its spatial distribution is a matter of serious concern, with cereal, potato, onion and oilseed growing states bearing the brunt. However there is now a nascent consensus building-up that recent surge in rainfall might give a face lift to rural demand," elaborated Ghosh.

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