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Mitul Kotecha , senior emerging markets strategist at TD Securities, points out that India’s growth picture has deteriorated, pushing the local authorities to pursue a rash of stimulus measures, the latest of which was a cut in corporate taxes.

Key Quotes

“The problem of weak demand remains a headwind. We now expect GDP growth to undershoot officials forecasts, and look for GDP growth of around 6.4% in FY 2019-20.”

“The RBI is complementing the government’s moves by cutting policy rates and allowing underperformance of the INR. Further cuts are expected, with a 25bps cut likely next week and at least one more cut in Q1 19. However, the room for further easing is narrowing.”

“Structural issues continue to remain an impediment to a sustained improvement in activity and we think that India’s authorities have a struggle on their hands to boost growth given limited fiscal space. In particular banking sector problems have restrained the ability to funnel credit to where it is most required.”

“We also expect the INR to be utilised as a tool to support growth. We think RBI may favour FX weakness as a means to stimulate exports and the economy, as long as the pass through to inflation remains low. We expect a gradual depreciation of the INR to around 72.6 vs. USD by end 2019.”