Goldman, Merrill Lynch lower India growth rate

Cite weaker investment outlook due to policy uncertainties

Within days of Morgan Stanley and StanChart revising downwards the country’s growth forecasts for the current fiscal, Goldman Sachs and Bank of America- Merrill Lynch steeply scaled down their GDP estimates for India to 6.6 and 6.5 per cent respectively for 2012-13.

These two revisions are the lowest forecasts yet, as the projection of Morgan Stanley is 6.8 per cent while that of StanChart is at 7.1 per cent, and are drastically lower than the government forecast of 7.6 per cent.

“We are revising our GDP growth forecast for fiscal year 2013 down to 6.6 per cent from 7.2 percent, largely due to a weaker investment outlook in part driven by domestic policy uncertainties and more back-ended and lesser monetary policy easing, and in part by prevailing global uncertainties,” Goldman Sachs India economist Tushar Poddar said in a note.

Meanwhile, Bank of America-Merrill Lynch India economist Indranil Sen Gupta, pegging the March quarter GDP at 6 per cent, said fiscal year 2013 growth will be just 6.5 per cent if Greece stays in the euro, and will be sharply lower at 5.5 per cent if Athens decides to dump the European monetary union.

“We cut our fiscal year 2013 growth forecast by 30 bps to 6.5 per cent from our previous forecast, with the European crisis dragging on more than anticipated. In case of a Greece exit, growth can fall to 5.5 per cent. Meanwhile, March quarter growth would also come in at an anaemic 6 per cent, pulling our fiscal year 2012 growth forecast down by 20 bps to 6.7 per cent for fiscal year 2012 ,” Sen Gupta said.

On May 21, Morgan Stanley cut India’s growth forecast to 6.8 per cent from 7.5 per cent. “With policy makers continuing to delay action to address the unsustainable bad mix of growth, we now think that GDP growth is likely to face another leg down. A deeper and longer growth slowdown is up ahead. Accordingly, we expect GDP to decelerate to near crisis level at 6.8 per cent this fiscal,” Morgan Stanley Managing Director Chetan Ahya said.

Ahya also said the core WPI inflation will head above 8 per cent by the fiscal end.
On Wednesday, Standard Chartered Bank too revised downwards the GDP growth forecast to 7.1 per cent from earlier estimate of 7.4 per cent and inflation forecast to 7.2 per cent from 6.5 per cent projected earlier.

“We revise down our growth forecast to 7.1 per cent for fiscal year 2013 on relatively restrictive monetary policy and inflation at 7.2 per cent,” the British lender had said in a research note.

Goldman also revised upwards its inflation forecast for the fiscal saying: “We are also revising up our fiscal year 2013 core inflation forecast to 6.5 per cent from 5 per cent due to significantly higher food prices and an increase in domestically administered fuel prices.” Accordingly, Poddar of Goldman said he too is reducing his rate cut forecast to 50 bps by 4Q, from 75 bps earlier, due to higher inflation in the near-term.

“Our rate cuts forecast is now more back-loaded than earlier. We, however, continue to think weaker core inflation, and sustained weakness in industrial activity will give the Reserve Bank space to cut rates in 4Q,” Poddar said.

On any interest rate cuts by RBI, Goldman said it is expecting lesser and more back-ended monetary policy easing. “Therefore, we now expect a much shallower recovery in investment demand, and are shaving off 40 bps of contribution from investment to GDP growth.”

On the rupee, Poddar said, “while we recognise clear near-term risks to the rupee/dollar forecasts, we think the current sell-off is overdone. We have taken a more sanguine view in the medium-term. Based on the central bank’s preference to intervene to stabilise the rupee, and the balance of payment being funded on a full-year basis, we are keeping our 3, 6, and 12-month forecasts unchanged at 53, 50.7 and 50, for the rupee respectively.”

BofA-ML’s Sen Gupta said though several lead indicators such as business confidence, OECD lead indicator, and earnings have improved to neutral from negative, a growth turnaround is likely only after lending rates come off say by 50 bps to reverse the slowdown in loan demand.