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India Country Risk Reports Q2 2015

India Country Risk Reports Q2 2015

Core Views

The ongoing standoff over the Himalayan border between India and China will continue to strain relations as the dispute is likely to persist for the foreseeable future. Frequent military stand-offs will disrupt dialogue between the two countries.

We maintain our above consensus forecast for India's real GDP growth to accelerating to 5.6% (consensus expectations of 5.5%) in FY2014/15 (April-March) from 4.7% in FY2013/14. The government's pro-growth agenda and resilient private consumption will support an economic growth revival over the coming quarters. While the pace of recovery will also depend on the timing of monetary easing, we have seen optimistic signs from the strong GDP print of 5.5% for the first half of the fiscal year.

Headline inflation has eased significantly in India on the back of moderation in food prices, which accounts for about half of the consumer price inflation (CPI) basket. With inflation receding, this provides room for the Reserve Bank of India (RBI) to ease interest rates by 25 basis points (bps) to 7.75% by Q4FY2014/15 as it turns its focus towards supporting economic growth. Beyond FY2014/15, we are forecasting that the central bank will cut interest rates further by a total of 75 bps before March 2016.

While the Indian rupee has been the top performer in Asia in 2014 in spot and carry-adjusted terms, we expect the currency to depreciate slightly due to general weakness among emerging market currencies and reserve accumulation by the RBI. We forecast the Indian rupee to average INR62.75/USD in 2015 and INR63.75/USD in 2016.

Major Forecast Changes

We have revised our forecast for India's current account deficit as a share of GDP to narrow slightly to 1.6% in FY2014/15 (versus our previous forecast of 2.0%) from 1.8% in FY2013/14 on the back of the plunge in global oil prices.

We have revised our forecast for the INR to average INR62.75/ USD in 2015 and INR63.75/USD in 2016, shifting to a neutral view on the Indian rupee in spot terms as compared with our previous constructive outlook. Our revision was predicated on the back of broad weakness among emerging market currencies as well as the accumulation of reserves by the Reserve Bank of India (RBI).


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Himalayan Border Rivalry To Strain Sino-Indian Relations
The ongoing standoff over the Himalayan border between India and China will continue to strain relations as the dispute is likely to
persist for the foreseeable future. Frequent military stand-offs will disrupt dialogue between the two countries.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Gradual Reform To Prevail Over The Coming Decade
India's new government has the strongest mandate in 30 years to transform the economic and political landscape, and make the country
more prosperous and business-friendly. The main challenges will be tackling obstructionism from regional governments and traditional
interest groups, and ensuring that future economic growth consolidates a politically moderate middle class.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Economy To Stay Resilient Despite Q2FY2014/15 Slowdown
Despite real GDP growth slowing to 5.3% year-on-year (y-o-y) in the second quarter of FY2014/15 (quarter ending September) from
5.7% y-o-y in the previous quarter, the outlook for the Indian economy remains strong on the back of the government's pro-growth
agenda and private consumption which will remain resilient. As such, we maintain our forecast for real GDP growth to accelerate to
5.6% in FY2014/15 (April-March) and 6.3% in FY2015/16 from 4.7% in FY2013/14.
TABLE: Economic Activity
Fiscal Policy
Public Debt-To-GDP Ratio To Continue Falling
India's public debt-to-GDP ratio has been on a downtrend over the past decade, falling to 72.7% in FY2013/14 (April-March) from 90.2%
in FY2004/05. We forecast this decline to continue, reaching 72.4% in FY2014/15 and 70.7% in FY2015/16, owing to the country's
economic recovery and improvements in the government's fiscal deficit.
TABLE: Fiscal Policy
Monetary Policy
Rate Cut On The Cards As RBI Turns Dovish
We expect the Reserve Bank of India (RBI) to ease its benchmark repurchase (repo) rate by 25 basis points (bps) to 7.75% by the
end of Q4FY2014/15 (April-March) as it turns its focus towards supporting economic growth amid falling price pressures. Beyond
FY2014/15, the central bank is likely to cut interest rates further by a cumulative 75 bps by the end of March 2016 given medium-term
disinflationary dynamics. Moreover, the probability of the RBI reducing the repo rate at its next meeting on February 3 2015 is increasing
as it shifts to a dovish stance, which is evident from its latest monetary policy meeting statement on December 2 2014.
TABLE: Monetary Policy
Currency Forecast
INR: Neutral Outlook As Currency Remains Resilient
The Indian rupee has been the top performer in the Asian region over the course of 2014 in spot and carry-adjusted terms and we
expect the unit to remain relatively resilient in 2015. The currency will decline slightly on the back of general weakness among emerging
market currencies as well as depreciatory pressures from the accumulation of reserves by the central bank. However, this weakness will
not be excessive as increased inflows will lend some support.
TABLE: BMI CURRENCY FORECAST
TABLE: Curent Account
INDIA Q2 2015
Chapter 3: 10-Year Forecast
The Indian Economy To 2024
Will Indian Growth Live Up To Expectations?
Improving demographics, structural reforms and trade liberalisation in India during the 1990s set the stage for an explosion in the
country's domestic savings rate, which, in turn, ignited economic growth in the 2000s. Going forward, favourable demographics and
trade integration should remain strong tailwinds. However, should India's reform momentum continue to disappoint, the country could
struggle to generate sufficient savings growth to finance its investment needs, with headline economic growth suffering as a result. With
this in mind, we are happy to maintain a sanguine, if cautious, long-term growth outlook with a 10-year average real GDP growth rate of
6. 5%.
TABLE: Long-Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: Operational Risk
Availability of Labour
TABLE: Asia – Availability Of Labour Risk
TABLE: Top Ten Source Countries For Migrant Workers
Crime Risk
TABLE: Asia – Crime Risks
TABLE: Crime Rates
Chapter 5: Key Sectors
Autos
TABLE: Aut os Total Mar ket – Hist orical Data And Forecasts
Food & Drink
TABLE: Food Consumpti on Indicators – Hist orical Data & Forecasts
TABLE: Hot Drin k Value /Volume Sales , Producti on & Trade – Hist orical Data & Forecasts
Other Key Sectors
TABLE: Oil & Gas Sector Key Indicators
TABLE: Pharma Sector Key Indicators
TABLE: Infrastructure Sector Key Indicators
TABLE: Telecoms Sector Key Indicators
TABLE: Defence & Security Sector Key Indicators
TABLE: Freight Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Global Assumptions
Table : Devel oped States , Real GDP Growt H, %
Table : BMI VERSUS BLOO MBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table : Emerging Mar kets , Real GDP Growth , %

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