B Prasanna, the Group Head of Global Markets at ICICI Bank, spoke about the recent GDP numbers, which came as a surprise to many. He believes the economy has hit its lowest point and will start improving in the second half of the year. Although ICICI Bank predicts a decent GDP growth of around 6.5% in the second half and 6.3% for the whole year (FY25), these numbers are lower than what everyone expected, including the Reserve Bank of India (RBI), which had anticipated over 7% growth earlier this year.
Prasanna mentioned that a cut in the Cash Reserve Ratio (CRR)—the money banks are required to hold with the RBI—would be crucial to encourage banks to lend more, especially to small and medium businesses. He doesn’t expect the RBI to cut interest rates in the December meeting but anticipates a 50-basis point reduction in CRR, possibly in two steps of 25 basis points each, accompanied by a more relaxed talk about future rate cuts.
He acknowledged that the recent GDP growth of 5.4% was unexpected and significantly below predictions, mainly due to slower government spending and reduced manufacturing output. Factors such as heavy rainfall and tighter liquidity in the market have contributed to this slowdown.
He believes that while the government aims to increase spending, it may be challenging due to the need to meet budget targets, especially with ongoing elections affecting their plans. However, he expects government spending to rise in the coming months.
While infrastructure projects and real estate revival are helping the economy, there are concerns about slowing consumer spending and the private sector not stepping up as expected. Overall, Prasanna feels that the worst is likely over, but the recovery will not be quick enough to make up for earlier losses.
Regarding the RBI’s next steps, Prasanna thinks they will prioritize managing both inflation and growth moving forward. He mentions that lowering expectations of inflation could allow for more flexibility in monetary policy. Therefore, while a big rate cut isn’t expected just yet, a CRR cut seems on the horizon to improve lending conditions, particularly for small businesses which need it the most.
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