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Moody's slashes India's GDP growth forecast to 5.4% for 2020

18 Feb 2020 Evaluate

Moody's Investors Service has slashed India's Gross Domestic Product (GDP) growth forecast to 5.4 percent for 2020 and 5.8 percent for 2021, down from its previous projections of 6.6 percent and 6.7 percent respectively, on slower than expected economic recovery. In its update on Global Macro Outlook, it said India's economy has decelerated rapidly over the last 2 years and economic recovery is likely to be 'shallow'. It added that the reduction in India's growth rate reflects domestic challenges rather than external factors.

Stating that the key to stronger economic momentum would be the revival of domestic demand and bank credit growth, Moody's said the Union Budget 2020 did not contain a significant stimulus to address the demand slump. With a weak economy and depressed credit growth reinforcing each other, it said it is difficult to envision a quick turnaround of either, even if economic deceleration may have troughed. It noted that as similar policies in other countries have shown, tax cuts are unlikely to translate into higher consumer and business spending when risk aversion is high.

The rating agency expects additional easing by the Reserve Bank of India (RBI). However, it said if the recent rise in CPI inflation, mainly as a result of higher food prices, is seen to have second-round effects, this would make it more challenging for the central bank to cut interest rates further. It also stated that resumption of credit growth is equally important as reviving demand, and banks have been reluctant to lend or lower lending rates despite successive rate cuts by the RBI.

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