India’s central bank is optimistic the 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.
Reserve Bank of India Governor Urjit Patel and his monetary policy committee lowered inflation projections, raising expectations that interest rates will be on hold for sometime now. 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 India remain relatively immune from the escalating trade war between the U.S. and China. The Reserve Bank forecasts the $2.3 trillion economy will expand 7.4 percent in the financial year to March 2019. That’s faster than a 6.5 percent 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, economist at RBL Bank Ltd. in Mumbai. “It will boost the general market sentiments and bond markets in particular.”
Earlier Thursday, the MPC retained the benchmark repurchase rate at 6 percent, 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 decision helped extend a rally in the bond market, triggered last week by the government’s decision to cut its first-half borrowing plans. It was further fueled after the RBI on Monday allowed lenders to spread their debt market losses over four quarters. Indian shares also rebounded.
Nevertheless, Patel said 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, trend in crude oil, other commodity prices and outlook for southwest monsoon will remain key in determining the policy trajectory, said Garima Kapoor, Mumbai-based economist at Elara Securities India Pvt who has 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 percent in the year started April 1. While that is still above the Bloomberg consensus of 7.4 percent, 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 percent in the fiscal year 2018 that ended March 31.
Still, the central bank is upbeat on growth following the recent run of positive economic activity data.
Earlier in the day, data showed India’s dominant services sector bounced back into expansionary territory in March. The Nikkei India Services Purchasing Managers’ Index rose to 50.3 in March from 47.8 in February. The rise 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.”