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RBI optimistic about Indian economy as trade war looms

Slowing inflation, accelerating growth and an economy that relies on domestic consumption may help cushion India from the escalating trade war between the US and China.

business Updated: Apr 06, 2018 13:57 IST
Anirban Nag, Bloomberg
Goldilocks economy,RBI monetary policy,RBI
RBI governor Urjit Patel and his monetary policy committee lowered inflation projections on Thursday, raising expectations that interest rates will be on hold for sometime to come.(Reuters File photo)

The Reserve Bank of India (RBI) is optimistic that the Indian economy would outpace China to become the world’s fastest growing major market this year and help lure investors seeking opportunities as a global trade war brews.

RBI governor Urjit Patel and his monetary policy committee lowered inflation projections on Thursday, raising expectations that interest rates will be on hold for sometime to come. That may boost flagging investments and demand, both of which were hit by a cash ban imposed in late 2016 and the chaotic implementation of a consumption tax last year.

Slowing inflation, accelerating growth and an economy that relies on domestic consumption may help cushion India from the escalating trade war between the US and China. The Reserve Bank forecasts the $2.3 trillion economy will expand 7.4% in the financial year to March 2019. That’s faster than a 6.5% expansion projected for China in 2018 in a Bloomberg survey.

“The Goldilocks scenario that RBI has outlined for the new fiscal year -- with higher growth expectations and lower inflationary forecasts -- could very well indicate rates on hold for the whole year,” said Rajni Thakur, an economist at RBL Bank Ltd. in Mumbai. “It will boost the general market sentiments and bond markets in particular.”

The MPC retained the benchmark repurchase rate at 6% on Thursday, as predicted by all 42 economists in a Bloomberg survey. Five of the six-member committee voted for the decision, while one sought a hike. It also kept its neutral policy stance.

The move helped to extend a rally in the bond market, triggered last week by the government’s decision to cut its first-half borrowing plans, and even though the central bank disappointed some by leaving the cap on foreign ownership of sovereign debt unchanged. The yield on the benchmark 10-year bond fell 17 basis points to a four-month low of 7.13% on Thursday. Indian shares also rebounded.

Patel continued to strike a cautious tone though, saying fiscal slippages from the federal as well as state governments and any chances of a below-normal monsoon meant that risks to inflation were on the upside. Companies polled by the RBI said input and output prices were rising and this could be passed on to consumers.

Factors such as food prices, the trend in crude oil, other commodity prices and the outlook for the southwest monsoon will remain key in determining the policy trajectory, said Garima Kapoor, a Mumbai-based economist at Elara Securities India Pvt, who had penciled in one rate hike in the second half of the financial year.

“Growth has been recovering and the output gap is closing,” the RBI said in a statement in Mumbai. That is reflected in a pick-up in credit off-take in recent months, and the large mobilization of resources from the primary capital market should support investment activity further.

Investment banks such as Goldman Sachs Group Inc. expect India to grow at 7.6% in the year started April 1. While that is still above the Bloomberg consensus of 7.4%, the pace is probably insufficient for Prime Minister Narendra Modi to create enough jobs in time for the national elections due early next year. India’s economic growth is forecast to slump to a four-year low of 6.6% in the fiscal year 2018 that ended March 31.

Key points from the Monetary Policy Statement
  • CPI forecast for first-half of FY19 revised to 4.7-5.1% from 5.1-5.6%; second-half forecast at 4.4% from 4.5-4.6%
  • GDP growth seen at 7.4% in FY19 vs 6.6% in previous year, "with risks evenly balanced"
  • Rising trade protectionism, financial market volatility could derail global recovery; says Indian companies and banks must continue cutting debt
  • RBI exploring creation of a digital currency; forms panel to study and submit report by June

Still, the central bank is upbeat on growth following the recent run of positive economic activity data.

India’s dominant services sector bounced back into expansionary territory in March, with the Nikkei India Services Purchasing Managers’ Index rising to 50.3 from 47.8 in February. The increase came amid greater inflows of new work orders, an improvement in business sentiment. A number below 50 indicates a contraction.

A similar survey, on April 3, showed the manufacturing sector growing, albeit at a slower pace.

“There are now clearer signs of revival in investment activity,” the central bank said. “Global demand has been improving, which should encourage exports and boost fresh investment.”

First Published: Apr 06, 2018 13:57 IST