Only counter-cyclical measures can prevent economy: Report

An easy stance by the fiscal and monetary sides will not result in an inflation spiral as the economy is performing far below its potential growth rate, analysts at Bank of America Securities said.

Mumbai: Warning that the economy can get into a "structural slowdown", a foreign brokerage on Wednesday called for adopting counter-cyclical measures to prevent such a development.

An easy stance by the fiscal and monetary sides will not result in an inflation spiral as the economy is performing far below its potential growth rate, analysts at Bank of America Securities said.

The comments come at a time when growth has slid to an over six-year low of 4.5 percent for the September quarter, despite the many steps taken by both the RBI and government.

Indraneil Sengupta, India economist at the brokerage, told reporters that growth has bottomed out in the September quarter and shall begin rising on the back of base-effects.

He expects GDP to clip at 6.6 percent FY21 on the weak base and also a potential rise in consumption if more action from policy side comes in.

"If you do not ease now, then you can go into a structural slowdown. Fiscal and monetary policies have to be counter-cyclical. They can be tightened later," he said.

He suggested that the fiscal impact of such policies should not bother as much and that the present deficit is much lower than the medium-term average of 4.5 percent.

The brokerage expects the country to breach the budgeted fiscal gap and end up with a fiscal deficit of 3.8 percent in FY20, and narrow it down to 3.5 percent in FY21.

The brokerage expects the RBI to cut rates by 0.25 percent in February to lower rates ahead of the busy lending season for the retail and small business borrowers.

Headline inflation will peak at 6.5 percent in December, which will be driven by 100 bps and 30 bps of this will be due to higher onion prices, and telecom tariff hikes.

According to Sengupta, the present slowdown is due to a hike in real interest rates. The real interest rate was at an easier level of 5 percent in 2014, and has risen to as high as 13 percent, making it difficult for borrowers, he said.

As a remedy, he suggested an interest rate subvention of 10-20 bps for small businesses to revive the growth process, which will not have a big impact on the fiscal arithmetic.

On the rupee front, the brokerage expects the rupee to settle at the present levels on a stable current account deficit on the back of stable oil prices, no rise in foreign fund flows and RBI's stance not to let the rupee swing either ways.