The Indian economy has broadly benefited from the reforms undertakenby the government since it took office in May 2014 and weexpect the administration led by Prime Minister Narendra Modi tocontinue to enact incremental reforms over the coming years, whichshould be positive for the economy.
We remain broadly constructive on the Indian economy, and it willremain as the fastest growing major economy in Asia owing to robustmanufacturing and services sectors and increased infrastructurespending highlighted in the Union Budget. We forecast real GDPgrowth to come in at an average of 6.6% over the next decade. Whilehigh frequency indicators such as the purchasing managers’ indexreflect a recovery in commercial activity following the demonetisationshock in November 2016, weak private investments and public banks’bad debt struggles will continue to weigh on the growth outlook.
The Reserve Bank of India (RBI) cut its key repo policy rate from6.25% to 6.00% at its monetary policy meeting that ended on August2, and in our view, the central bank appears to have dialled back itshawkish bias amid a slowdown in real GDP growth. While our coreview is still for the central bank to stand pat on interest rates overthe course of FY2017/18 (April-March), the risks to monetary easingover the coming months are rising, particularly if headline consumerprice inflation remains around historical lows, and as policymakersseek to provide greater support to economic growth.
India’s overall fiscal deficit as a share of GDP has been narrowingsince FY2011/12 (April-March), majorly due to efforts by the centralgovernment to consolidate its accounts and we expect the country’sfiscal situation to improve over coming years. Increasing pressuresparticularly on state governments to provide financial assistanceto the agricultural sector through granting loan waivers to farmerscould lead to cost slippages and higher borrowings, hampering theBJP’s overall fiscal consolidation plans.
Over the longer term, a slightly overvalued real effective exchangerate, as well as higher inflation relative to the US, should see theIndian rupee depreciate mildly in spot terms against the US dollar,even though higher interest rates will see the currency outperformin total return terms.