Domestic demand likely to spur India’s economic momentum, RBI likely to cut rate in Q1 2017

Amongst the major economies globally, India is likely to be the economic growth outperformer, noted Scotiabank in a research report. Domestic demand is expected to drive the momentum that is responding to supportive policymaking and structural reforms. In the meantime, India is less reliant on external demand as compared to most of its peers, and this augurs well for India’s prospects amidst a time of sluggish world trade.

India’s real GDP is expected to grow to almost 8 percent year-on-year in 2018 from 7.6 percent year-on-year in 2016-2017, according to Scotiabank. Normal monsoon rainfall is underpinning rural incomes, agricultural output and consumption. The Indian government’s commitment to enhance rail, road and energy infrastructure would give additional support. However, India is likely to keep on struggling with a lack of private sector investment until the country’s business environment rebounds further, said Scotiabank.

Meanwhile, the inflation environment in the country is favorable. The consumer price inflation decelerated to 4.2 percent year-on-year in October after averaging 5.4 percent in the January to September period. Inflationary pressures are expected to stay contained in India in the near term, helped by the normal monsoon rainfall which would keep the price rises of food in check.

Price pressures, in the medium term, are expected to gradually bolster consistent with global energy prices. But the inflation is still likely to stay within the RBI’s 4 percent, plus or minus 2 percent year-on-year target through 2018, added Scotiabank.

The Reserve Bank of India cut the repo rate by 25 basis points to 6.25 percent in October after Governor Urjit Patel took office. The central bank is expected to cut rate one more time in the first quarter of 2017. Governor Patel is expected to stay committed to the central bank’s inflation targeting framework as it improves policy credibility, underpins investor sentiment and assists in anchoring inflation expectations, stated Scotiabank.