The Indian economy has broadly benefitted from the reforms undertakenby the government since it took office in May 2014, andwe expect the administration led by Prime Minister Narendra Modito continue to enact incremental reforms over the coming years,which should be positive for the economy. That said, the BharatiyaJanata Party (BJP)'s lack of a majority in the 245-seat upper houseand high levels of bureaucracy will continue to act as hurdles to itsreform efforts.
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) left its key repo policy rate steadyat 6.25% at its monetary policy meeting that ended on June 7, and inour view, the central bank appears to have dialled back its hawkishbias as it lowered its inflation projections. While our core view is stillfor the central bank to stand pat on interest rates over the courseof FY2017/18 (April-March), the risks to monetary easing over thecoming months are rising, particularly if headline consumer priceinflation remains around historical lows, and as policymakers seekto 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 the coming years. That said,increasing pressures particularly on state governments to providefinancial assistance to the agricultural sector through granting loanwaivers to farmers could lead to cost slippages and higher borrowings,hampering the BJP'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.