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Stimulus not enough to change growth outlook: Goldman Sachs

January 05, 2009 18:44 IST

Steps announced by the government and RBI to arrest economic slowdown will not change the growth outlook for the current fiscal, global financial firm Goldman Sachs said in a report on Monday, even as it felt the apex bank may go for another cut in policy rates by 50 basis points.

"While we welcome these counter-cyclical measures as a timely boost to confidence, we do not think that they will materially change the growth outlook," Goldman Sachs said in a Asia Policy Watch report.

Goldman said India's economy is likely to expand by 6.7 per cent in the current fiscal and 5.8 per cent in 2009-10.

The gross domestic product growth rate was 9 per cent in the previous fiscal.

Noting that RBI has since October reduced key policy rates several times, it said, "we believe the central bank will cut the repo and reverse repo rates by another 50 basis points in January to bring the corridor to 3.5-5 per cent."

As regards the cash reverse ratio, the amount that banks keep with the RBI, the central bank could reduce the ratio by another 150 basis points to inject more liquidity into the system, it added.

Since October, RBI has reduced the repo rate by 3.5 per cent, reverse repo by 2 per cent and CRR by 4 per cent.

The report said in the coming weeks, the banks could lower lending and deposit rates as a result of the easing money policy being followed by RBI.

"The fiscal and monetary measures announced will be positive for banks, NBFCs, and infrastructure companies, and limit further downside to growth," the report said.

In order to reverse the economic slowdown, the government on last Friday came up with a second stimulus package, while RBI announced cuts in key policy rates and ratios to ease liquidity situation.

Goldman Sachs said inflation is on a downward trajectory and going forward it will continue to fall.

"The risks are clearly towards even more aggressive cuts as growth continues to falter, and inflation decline rapidly," it said.

The report said the government has done everything it could to stimulate the economy, and "there is not much left in the tank."

Going forward, it added, the government should focus on removing supply side constraints and more forcefully implementing the pre-announced spending plans, especially in infrastructure projects.

The government in the second stimulus enabled the industry to borrow more from abroad and FIIs to invest more in the country, besides stepping up public spending.

While allowing states to access market for borrowing about Rs 30,000 crore (Rs 300 billion) to meet additional expenditure, the package provides for liberalisation of external commercial borrowing norms and raising FII investment limit in rupee-denominated instruments to $15 billion from $6 billion now.

The Reserve Bank of India [Get Quote] eased money supply further by cutting key policy rates and reserve ratios - decisions that would among other things infuse Rs 20,000 crore (Rs 200 billion) into the banking system.

The central bank cut cash reserve ratio -- the amount of cash that banks need to keep in cash with RBI - by 0.50 percentage point to five per cent.

It also cut repo and reverse repo - the short-term rates at which RBI lends and borrows from banks - by 100 basis points each to 5.5 per cent and four per cent, respectively.

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