India Growth to Hold Strong; Rate Cut Likely, But Not Soon

PM Modi\'s government has also since delivered, in February, a budget that provides some economic stimulus to farmers.

Published: 14th April 2016 01:23 PM  |   Last Updated: 14th April 2016 01:23 PM   |  A+A-


A worker grinds a gear rod used in a textile machine inside a small scale manufacturing unit in Ahmedabad, India, April 12, 2016. REUTERS

BENGALURU: India's growth rate is set to remain one of the fastest in the world this year with inflation running just slightly above 5 percent, leaving the Reserve Bank of India (RBI) on the sidelines for at least another six months, a Reuters poll showed on Thursday.

The RBI is forecast to cut the repo rate to 6.25 percent in the last three months of the year, according to a poll of more than 40 economists taken April 6-13, but much will depend on the inflation outlook.

The same poll forecasts inflation, which has risen to 4.83 percent from a recent low of 3.69 percent last July and a series low of 3.27 percent in late 2014, to average 5.3 percent this fiscal year. That is the same level seen in a January survey.

Since then, the RBI has cut the repo rate once to 6.50 percent, the lowest since 2011, and 1-1/2 percentage points below a peak of 8.0 percent in January 2015.

Prime Minister Narendra Modi's government has also since delivered, in February, a budget that provides some economic stimulus to farmers and pledges a substantial rise in investment in crumbling infrastructure.

Even with that in the pipeline, economists assigned a 70 percent probability of a rate cut at some point this year. But with the economy doing relatively well and the inflation rate on the rise, clearly the central bank is not in a hurry.

"We believe the current benign inflation trajectory, only a modest recovery in economic activity and the central government's demonstrated commitment towards fiscal discipline remain conducive for the RBI to maintain its accommodative bias," wrote Barclays economists Rahul Bajoria and Siddhartha Sanyal.

"We continue to expect another 25 basis point repo rate cut in 2016, with the risk of more."

However, a significant minority of economists in the poll, 16 of 37, anticipate no further rate cuts this year.

If RBI Governor Raghuram Rajan does deliver another cut, it will be welcomed by the government, which is two years into a mandate that heralded major economic reform but is still faced with the challenge of kick-starting an investment cycle.

One main obstacle is an ongoing reluctance by commercial banks to pass on lower benchmark rates to customers. So far, banks have passed on less than half of the 150 basis points' of RBI repo rate cuts since January 2015.

One of the biggest unknowns about inflation this fiscal year will be determined by the monsoon rains between June and September, crucial in a country where most of the population depends on agriculture.

Data from the weather office on Tuesday suggested above-average rainfall this year, which may would boost crops and keep a lid on food prices.

On the other hand, a nearly 25 percent hike in salaries and pensions for about 10 million current and former government employees under a once-a-decade federal government review could bump up inflation.

But analysts in the latest poll appear confident about growth. They expect the economy to expand 7.8 percent in the fiscal year ending March 2017, a prediction that has remained largely unchanged over the past six months.

That is even higher than the latest Reuters poll forecasts for the official growth rate in China, expected at 6.5 percent in 2016 and then 6.3 percent in 2017.

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