The Development Bank of Singapore expects Reserves Bank of India to cut its policy rates by 0.25 per cent this week. The latter will allow the RBI to be non-committal on the future course of action, retaining the flexibility to react to the evolving inflation trajectory, said DBS, a leading Asian bank with focus on further expanding in India. “We expect a 25 basis points (0.25 per cent) cut on August 2, with no change in their neutral stance,” said DBS in today’s economic report.Domestic factors are likely to be given a higher weightage in swaying the decision, compared to global factors, it said. At home, Consumer Price Index (CPI) inflation has undershot official projections consistently for the past six- seven months, with the June print slipping below the targeted 2-6 per cent range, it noted.“While the sharp drop in June CPI to 1.5 per cent year on year is partly amplified by base effects, we do not expect the second half of the year rebound to be as sharp as feared,” said DBS. Food prices have corrected sharply, in particular the routinely volatile pulses and vegetables.Structural factors and production trends signal that food inflation should settle around 2-3 per cent over the next few months, according to the bank. Downside risks from other factors are also notable – low oil prices, strong rupee, normal monsoon and disinflationary impact from Goods and Services Tax (GST) changes.Beyond the mechanical uplift from housing rent allowance changes, concerns over second round effects are not likely to materialise. Real interest rates (one-year t-bill minus inflation) are also high about 400 basis points (4 per cent) compared to the RBI’s preference for 1.25-1.75 per cent, thanks to easing inflation while rates remain high.This provides sufficient cushion for the central bank to lower rates, DBS said. “While this spread will further narrow as inflation gradually picks up in the months ahead, we do not expect the RBI to lower rates aggressively just to drive these real rates towards their preferred levels,” said the bank.
India’s GDP growth will remain in the range of 6.5-7.5 per cent over the next 12-18 months and GST will support the momentum for faster growth, a Moody’s poll said today. More than 75 per cent respondents said exposure to large corporates in power, steel and infrastructure sectors poses as the greatest risk to banks’ asset quality in India. Over 200 market participants, polled by Moody’s and its affiliate ICRA, were confident of India’s stable economic growth prospects. “India’s GDP growth rate will remain in the range of 6.5 -7.5 per cent over the next 12-18 months, according to more than 60 per cent of the respondents,” Moody’s said in a statement. The view is in keeping with signs of economic recovery after the short-term negative impact of demonetisation. According to the estimates of the US-based agency, the economy will grow 7.5 per cent in 2016-17 and 7.7 per cent in 2017-18.Moody’s believes that economic growth will gradually accelerate to around 8 per cent over the next 3-4 years. “Given economic and institutional reforms in India and further changes that could follow, India will likely grow faster than similarly rated peers over the next 12-18 months despite a short-term drag caused by demonetisation,” Moody’s Associate Managing Director Marie Diron said. While the respondents believed that introduction of the Goods and Services Tax (GST) will support faster growth in the next 12-18 months, they were split on how much of a growth boost the tax reform will provide.The poll found that asset quality risks linger for banks and credit growth will remain subdued. “More than 75 per cent of the respondents agreed that exposure to large corporates in power, steel and infrastructure sectors will continue to be the greatest risk to the asset quality of Indian banks,” it stated.
India’s GDP growth is likely to be higher at 6.6 per cent in the June quarter from the previous three months this year even as the pick-up in growth numbers in India has lost some momentum on account of GST, says a report. According to Japanese financial services major Nomura, the pick-up in growth which was visible toward end-of March quarter had lost some momentum towards end of the June quarter due to destocking and uncertainty ahead of the Goods and Services tax (GST). “Despite some loss of momentum, we expect average GDP growth in Q2 (April-June) to be modestly higher at 6.6 per cent y-o-y from 6.1 per cent in Q1 (January-March),” Nomura said in a research note.It further noted that in the second half (H2) of 2017, growth recovery is expected to accelerate to 7.4 per cent led by a resumption of production after GST, ongoing remonetisation, normal monsoons and lower lending rates. The pick-up in growth numbers in the second half is likely to be led by a resumption of production (after GST), ongoing re-monetisation, stronger rural consumption buoyed by normal monsoons and easier financial conditions (lower lending rates, liquidity). “Pay hikes for state government employees and a pick-up in external demand could be an added tailwind,” it added. India lost the tag of the fastest growing economy to China in the March quarter with a GDP growth of 6.1 per cent, which pulled down the 2016-17 expansion to 7.1 per cent. “Excluding the GST, indicators of consumption appear to have stabilised while those for services continue to signal an improving outlook,” Nomura added.