India: More policy support likely after weak 2Q growth
- Starker than expected slowdown in 2Q GDP lowers trajectory for the year
- Policy intervention is underway
- We temper our growth forecasts and expect further cuts
- Worries over fiscal support and new 10Y issuance will put pressure on old 10Y
Breakdown reveals weak private sector and non-farm activity
Weaker momentum in demand side of the economy was evident in high-frequency indicators, albeit the extent of pullback in activity came as a surprise.
Contribution of the main domestic driver i.e. private consumption more than halved to 1.8 pecentage points, vs 4ppt in 1Q. Investment demand was nearly steady (YoY), whilst government’s final consumption eased. Net exports added to growth, as weaker exports were outdone by a slump in imports, improving the net balance.
On the supply-end, non-farm growth slumped to a five-year low, at 5.4% YoY, whilst the agricultural sector recovered from quarter before but was tepid at 2% YoY vs 1Q’s -0.1%. Industry growth halved from 3.4% YoY in 1Q to 1.7% in 2Q, led by a slump in manufacturing. Service sector activity also lost momentum but skirted a sharp correction. Core GVA i.e. GVA excluding agri and public administration, our preferred gauge for private sector momentum, eased to a two-year low.
Nominal GDP growth slumps; deflators signal divergence
Nominal GDP rose by 8% YoY, least since FY12, boding poorly for corporate earnings and macro ratios. Apart from posing a risk to corporate earnings and tax revenues, a further shortfall between the budgeted GDP growth and trending nominal growth will make achieving fiscal consolidation hard. Sectoral deflators signal divergence as farm terms of trade improved from earlier quarters, while demand-led sectors eased, pointing to a weak pricing power in response to subdued consumption.
Coordinating policy response under way
Policy intervention has been underway, by way of rate cuts and, more recently, government’s measures. On its part, the central bank has lowered the repo rate by 110bps in 2019, pushing banks to expedite transmission by encouraging linkage of lending rates to external benchmarks. Regulatory changes for banks and non-banks have also been undertaken.
Recent policy intervention is directed at breaking the cycle of weak sentiments and weak activity. These measures are timely as the government looks to reverse the cyclical slowdown. These steps will continue to tread the thin line of taking corrective measures and tightening implementation gaps, but with minimum fiscal costs (see here). Another tranche of changes was announced were announced late Friday, consolidating public sector banks and making regulatory changes.
Economy and markets outlook
Factoring in a weak start to FY20 (Jun quarter was the first quarter), a return to favourable base effects in 2HFY20, and likelihood of growth returning above 6.5% towards end of the year, we revise down our real GDP growth forecast to 6.2% YoY vs 6.8% previously. The resultant negative output gap will keep inflationary pressures in check. Expecting the trajectory to improve in FY21, growth is likely to close in on 7% with a 6.8% growth pace.
For monetary policy, limited fiscal implications from the latest fiscal measures keep the door open for further easing. The latest RBI minutes from the August review saw the committee members accord high priority to limit weakness to growth and to jumpstart transmission. We retain our call for another 15-25bp cut at the October meeting, on the back of a weak 2Q GDP outcome. Odds of further rate cuts are rising as a preference to preserve policy space might be overridden by growth concerns. We now expect another 15-25bp rate cut in December. Challenging global conditions and a dovish FOMC add to the case for the RBI to take a growth supportive stance.
More supportive measures from the government are likely, preferring to remain sector specific. Fiscal costs will be kept to a minimum. However, if the slowdown seems entrenched, broader stimulus can be expected next year (see here).
For the markets, worries over fiscal support and new 10Y issuance will put pressure on old 10Y prices. Rest of the curve is likely to continue easing as rate cut expectations are set to return, thereby steepening the yield curve. USDINR continues to watch CNY movements and broader dollar bias, which at this juncture points towards further INR weakness owing to a weak global environment.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.