GDP growth is expected to display a moderate uptick in H2FY14 as compared to the 4.6% expansion in H1FY14-ICRA

Systemic liquidity has eased significantly, benefiting from the unsterilized inflows of USD 34 billion through the swap windows for FCNR(B) deposits from NRIs and Banks' overseas borrowings, and measures such as the refinance facility for SIDBI. Nevertheless, liquidity conditions are expected to tighten somewhat in the next quarter, in light of the anticipated caution in spending by the Government of India (GoI) to meet its fiscal deficit target; some pickup in credit off-take in absolute terms in the busy season; and the commencement of the reverse leg of the swap by the Oil Marketing Companies. Nevertheless, a reiteration of the RBI's stance regarding ensuring adequate credit flow should provide comfort for the productive sectors.

GDP growth is expected to display a moderate uptick in H2FY14 as compared to the 4.6% expansion in H1FY14. In the near term, a correction in vegetable prices is expected to dampen food inflation in December 2013. However, inflation related to the non food manufactured products basket of the wholesale price index (core-WPI) may continue to edge upwards, with an uptrend in prices in export-oriented sectors and some lagged resetting of prices to offset the Rupee depreciation. With the RBI's stance indicating its readiness to act swiftly, including on off-policy dates if warranted, in the event that the expected softening of food inflation does not materialize, we expect a high likelihood of a Repo rate hike in the next quarter.

A revival in exports, restrictions on gold imports and inflows garnered through the aforementioned swap windows for Banks have improved sentiments regarding India's balance of payments situation and its ability to withstand concerns that may arise once the US Federal Reserve tapers its quantitative easing programme. Nevertheless, domestic political uncertainties and muted economic growth may result in intermittent FII outflows and increase exchange rate volatility. Moreover, concerns may resurface if restrictions on gold imports are lifted. Additionally, a weaker Rupee would exacerbate fiscal stress related to under-recoveries on sale of various fuels. As a result, in addition to the growth-inflation dynamics, the impact of global and domestic developments on the twin deficits will remain a key factor for the RBI's future course of action.

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