Indian economy likely to grow 7.3 pct in 2017, inflation to remain below RBI’s medium-term target

Indian economic growth is expected to accelerate to 7.3 percent this year and strengthen further to 7.5 percent in 2018, noted ANZ in a research report. Investment cycle is expected to stay subdued. The most marked development has been the slowing trend in inflation. CPI inflation has moderated in every quarter since June 2016 and came in below the lower bound of the RBI’s target range of 2-6 percent in June 2017. Benign oil prices, appreciation of rupee, demonetisation-induced decline in growth and astute food supply management by the government have been pivotal to the slowdown.

This scenario is further strengthened by the decent progress in the South-West monsoon that should guarantee a good cropping season. The trajectory of inflation is also in line with the sluggish growth environment. Activity indicators, especially those relating to industrial output and investment remain weak.

Sluggish trends in the manufacturing PMI also do not hint at a turnaround in the near future. Reviving the investment cycle in the current environment of high levels of corporate indebtedness and non-performing loans would be a time consuming process, according to ANZ. Even if public infrastructure spending is being increased, it would not be enough to counter the softness in private investment.

Meanwhile, the likelihood of additional easing by the Reserve Bank of India should keep foreign inflows stable, underpinning the Indian rupee. While the INR is now expensive from a real effective exchange rate perspective, the high real yield on offer from falling inflation continues to make it attractive to foreign investors. The central bank is expected to continue to intervene to restrict the appreciation; however, it is starting to face issues with absorbing the liquidity.

Other than monetary easing, reforms continue to augur well for the currency. Unsurprisingly, there were some initial hiccups in the implementation of the GST; however, they are likely to be temporary with benefits to growth and efficiency over the longer term.

“We continue to see the INR as a more resilient currency in Asia”, added ANZ.

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