Indian economy to expand below 7 pct this year, further upside in USD/INR likely

At around the same time as the U.S. presidential election, Modi government shocked the markets by withdrawing INR 500 and INR 1000 as legal tender, in order to tackle counterfeiting, curb funding of terrorism and nullify black money hoarded in cash, noted Commerzbank in a research report. To have the maximum impact, the element of surprise was required.

This move is expected to severely impact India’s fourth quarter GDP growth, with the government anticipating a dip to 5.5 percent year-on-year from more than 7 percent recorded in the prior quarter. According to Commerzbank, this is expected to push the country’s economic growth to below 7 percent for this year a whole.

The anticipated slowdown in both economic activity and inflation in the near term strengthens the Reserve Bank of India’s bias and willingness to give additional monetary stimulus. The responsibility is expected to shift towards underpinning growth rather than inflation. The next Reserve Bank of India meeting is scheduled to take place on the 6-7 of December.

There is a high possibility that the central bank might deliver a larger cut of 50 basis points in the interest rate to 5.75 percent instead of 25 basis points. Interest rate reduction of 50 basis points will signify a total cut of 100 basis points in 2016 on top of the 125 basis points reduction in 2015. Given the subdued growth outlook of India, the USD/INR currency pair is expected to see further upside movement, added Commerzbank.