New Delhi: HDFC Bank has slashed India`s growth outlook for the current fiscal to 5.8 percent from its earlier projection of 6.5 percent because of the deficient monsoon.
"Kharif sowing picking up but likely to be lower than last year. (We) see agricultural output falling by 3 percent in 2009-10 against previous forecast of 3 percent growth," the bank said in a research report.
The outlook of a negative growth in agriculture comes on the back of the Indian Meteorological Department`s revised rainfall forecast and uncertain impact of mitigants such as ground water harvesting and modification of cropping patterns.
"Reports of expected reduction in kharif output of up to 10 percent have prompted us to revise our agricultural growth forecast lower," the bank said.
However, it said price impact of a deficient monsoon can be reigned in by drawing down food stock buffer, extension of tax-free sugar imports, limits on grain exports and crackdown on hoarding.
Finance Minister Pranab Mukherjee today reiterated there would be no exports of foodgrains from the country at a joint meeting of state agriculture ministers on drought here.
Though the bank`s agricultural outlook has come down, its impact on India`s overall growth forecast has been partially mitigated by the rise in forecasts for growth in industry and services for the current fiscal.
The bank raised its growth forecasts for industry to 5.2 percent from 4.7 percent projected earlier, and for services to 8.6 percent as against prior outlook of 8.3 percent.
The bank saw initial signs of recovery in industry and services persisting through rest of the year. And growth drivers provided by fiscal stimulus and accomodative monetary environment would remain intact despite rainfall deficiency, it said.
Further, the impact of below average agricultural output on rural consumption is likely to be less severe than in the past as the National Rural Employment Guarantee Scheme and other infrastructure schemes mean greater income support to the rural population.
The bank said the June industrial growth of 7.8 percent, though unsustainable, corroborates emerging signs of recovery. Besides, liquidity within the banking system remains ample and this should keep the lending rates low till October-November.
"But pick up in credit growth in the second-half of the current fiscal will put free cash of banks under stress and indicate bottoming out of lending rates by December," it said.
"While a deficient monsoon may have pushed the likelihood of a rate hike further from Q4 FY10 to Q1 FY11, some form of monetary tightening via, for instance, a pull back in gilt buy-backs will likely be put in place by Jan-March 2010," it said.