India economic growth to remain solid, only one rate cut likely: Reuters poll

Monday, 25 July 2016 00:00 -     - {{hitsCtrl.values.hits}}

Reuters: India’s economy will hum along at a solid pace for the remainder of this fiscal year provided structural reforms are passed, while above-target inflation means the Reserve Bank of India will only cut rates once more this year, a Reuters poll found.

The poll of over 30 economists, taken in the past week, showed Asia’s third largest economy will expand 7.8% in the fiscal year ending March 2017, the fastest among big economies.

That latest consensus is largely unchanged from the previous three quarterly polls, despite worries about the global economy following Britain’s shock vote to leave the European Union, which roiled financial markets and is expected to curtail growth in large European economies.

The Reuters consensus view is also slightly more optimistic than the International Monetary Fund’s latest projection of 7.4% growth.

“India has settled into a comfortable stride. Growth looks impressive, even if that’s not always matched by feelings on the ground,” wrote Pranjul Bhandari, chief economist, India at HSBC.

“Luckily, the world’s economic travails have relatively little effect on what transpires locally. Faster reforms would help.”

One of the key economic reforms promised by the Narendra Modi-led government is a goods and services tax, which is expected to pass in the current session of Parliament, replacing multiple federal and state levies.

If the bill becomes law, it is expected to add up to two percentage points to India’s economic growth.

Meanwhile, inflation, which rose to 5.77% last month from a low of 3.69% in July last year, is expected to average 5.4% this fiscal year, slightly above the level seen in an April survey.

RBI wants inflation at 5% by the end of March 2017, so if the forecast is realised it could leave little room to cut the benchmark interest rate more than once this year.

Raghuram Rajan, whose term as RBI Governor ends in early-September, is unlikely to make any further policy changes and the onus would be on the new six-member monetary policy committee that is being constituted to decide policy.

Since the start of 2015, the RBI has cut its key repo rate by 150 basis points to a five-year low of 6.50%. When it meets next in August, it will hold policy steady, economists said, but they expect a 25 basis points cut in the October-December quarter.

The bank will then hold fire until at least the end of third quarter of fiscal 2017, the survey horizon, the poll found.

“We don’t see a rate cut in August as inflation remains elevated as of now. The RBI would like to see the trend in food inflation and if it is really going to come down with the coming rainfall,” said Tushar Arora, economist at HDFC Bank.

Rajan, after the policy meeting in June when rates were kept on hold, indicated the focus would be on meeting the 5% inflation target by end-March but may cut policy rates should room for easing emerge.

That may well be possible with food inflation likely to be in check following monsoon rains 4% higher than average, a welcome respite after two straight years of drought curbed agricultural output.

Above-average rainfall could also spur rural demand, which would extend India’s strong economic growth run, even as private capital investment still remains a concern.

“The only drag for the overall economy would be private capex which is still not showing any strong signs of recovery,” Arora said.