DBS Bank has revised its GDP (gross domestic product) growth forecast for India for the financial year 2019-20 to 6.8 percent on a year-on-year basis, from the earlier 7 percent, citing a more challenging trade outlook for the economy.
"Growth headwinds swiftly turn attention to the likely policy response. We expect monetary policy to do much of the heavy lifting, given limited fiscal leeway," the bank said in its report on the country's economy on Thursday.
Economists at the DBS Group Research also pointed at the Reserve Bank of India's (RBI) change in policy stance from neutral to accommodative and the 75 bps repo rate cut made so far in 2019.
With rupee being only marginally weaker and inflation staying well below target, it said that another 50 bps rate could be factored in repo rate for the FY20.
"We revise down our real GDP forecast for FY20 to 6.8 per cent YoY versus 7 per cent earlier," the bank said.
"A negative output gap will keep demand-side inflationary risks in check, with core inflation catching down with headline consumer price inflation (core at 4.2 per cent in May versus 6 per cent average in October-December 2018)."
"We expect inflation to remain sub-target this year (3.8 per cent YoY versus 3.4 per cent in FY19)... In the face of slowing growth and sub-target inflation, the need to hanker over a wide real rate buffer has reduced."
DBS economists also believe that global cues like easing US yields, a dovish US Federal Reserve outlook and cautious European Central Bank (ECB) have lowered the hurdle for the Asian central banks, including India's RBI, to embark on further easing.