Weak growth forecast a major pain point

The Reserve Bank of India’s (RBI’S) decision to cut policy rates by another 25 basis points (bps) in its fourth bi-monthly policy meeting, on Friday, failed to cheer investors.

While the rate cuts were closer to the lower band (25-40 bps) of expectations, the markets see the cut in growth estimates as the bigger worry. With a sharp 80 bps cut in the FY20 GDP forecast to 6.1 per cent, the Sensex and Nifty fell over 1 per cent. Including the combined reduction of 50 bps on the previous three occasions, the total cut in the FY20 GDP growth estimate stands at 130 bps. In light of growth worries, investors need to be cautious, say experts.

According to G Chokkalingam, founder of Equinomics Research & Advisory, the situation of global slowdown is tough for India, given the weak domestic growth. Thus, investors should be selective and stick to high-quality stocks in the small-cap and mid-cap space, and defensive sectors such as FMCG or IT, he added.

In FY08, FY12, and FY16 as well, global economic growth was under pressure, which had hurt domestic equity returns despite India’s growth being at decent levels. Therefore, the pressure on the Indian economy this time, with stress in key sectors, is worrisome.

Although Friday’s fall was led by financial stocks (Nifty Financial Service index fell 2 per cent) on the back of profitability concerns given the RBI’S focus on transmission of rate cuts, the regulator did highlight factors pointing to sluggish growth in H1FY20. For instance, the global economy has lost further momentum since the RBI’S August policy meeting.

The RBI also highlighted that intensifying US-China trade tensions, a hard Brexit, and geopolitical tensions were key downside risks to India’s baseline growth path.

Naveen Kulkarni, head (research), Reliance Securities says the RBI’S (dovish) stance is mindful of the structural slowdown, and that the market feels a greater push is needed.

Last month’s corporation tax rate cuts had created euphoria but had also led to scepticism of a widening fiscal deficit. RBI, though, feels fiscal deficit will remain under control. The government has stated it will adhere to the fiscal deficit target of the current year. Nonetheless, revival in economic growth remains the bigger worry.

Edelweiss analysts say they expect Mint Road to take the repo rate to 4.5 per cent (another 65 bps cut) by FY20 — India’s lowest. “We believe this, along with fiscal stimulus, is the need of the hour, given the negative growth impulses from the global economy,” they say.

While a good monsoon, l ower oil prices, improved liquidity, and a lower corporation tax should help, the speed and timing of recovery in GDP growth and India Inc’s earnings remains to be seen.