India GDP growth shows little sign of slowing – Move aside China, India will be the top growing economy once again next year say analysts at one of the world’s largest banks.
Day-to-day transactions remain badly affected in India since a Nov. 8 ban on large denomination bills in the largely case-based economy. The world’s fastest-growing country is widely expected to take a hit, with economist and former Prime Minister Manmohan Singh estimating a 2-percentage point fall in projected growth rates.
However, Barclays is maintaining its FY2016-17 growth forecast of 7.9%, despite downside risks of between 50 and 100 basis points. The government’s recent move – banning use of 500 and 1,000 rupee bills – will likely spill into two or three quarters from Q4 16 onwards, with manufacturing, construction, trading and transportation bearing the brunt, the British bank said in a research note Nov. 28.
“However, we believe the economy can rebound strongly after H1 17, and currently we do not factor in any major downside risk to our FY17-18 GDP growth forecast of 7.9%,” the bank said.
Demonetization may impact India GDP growth
Prime Minister Narendra Modi’s government has said the notes ban to curb tax evasion and corruption will be positive for growth in the medium- and long-term. The move has divided the nation as the dire shortage of currency is expected to continue into at least the first quarter of 2017, besides impacting the broader economy.
Given the comfortable inflation levels, Barclays expects the central bank to cut repo rates by 25 basis points, probably even 50 basis points, to overcome a significant fall in aggregate demand. The expectation comes despite a slide of the Indian rupee against the dollar, in line with several Asian currencies, and the likely Fed rate hike in December.
“We now expect the RBI Reserve Bank of India) to deliver a 25bp repo rate reduction at the monetary policy meeting on 7 December, followed by another 25bp rate cut during H1-17…We feel the central bank may even consider a more aggressive frontloading of monetary easing, i.e., say, a 50bp rate cut in December itself.”
On the other hand, Moody’s in a new note is slightly more pessimistic opining:
Prime Minister Narendra Modi has asked the Indian population to expect disruptions for about 50 days. Given the reliance of the Indian economy on cash-based transactions, we expect a material impact on GDP growth that could last for a few months.
Moody’s further notes:
India’s government revenue to GDP ratio is relatively low compared to similarly rated sovereigns (see Exhibit 2). In part, this reflects more modest income levels in India. Demonetization, together with other revenue-enhancing policy measures, such as the implementation of the Goods and Services Tax (GST), will ultimately contribute to raising the revenue intensity of economic activity.
The British bank also recommended a hold on 5-year Indian government bonds trade and set a target of 5.85% yields. RBI’s decision to raise the CRR on new deposits since Nov. 8 is expected to temporary halt the recent decline in bond yields. But Barclays does not expect a fundamental change to the downtrend for bond yields, but policy could be key.
If the central bank keeps the 100% incremental CRR on the new deposits at its meeting on Dec. 9, there could be a further slowdown in the decline of bond yields, it said.
Last week’s CRR move – a “blunt” tool – caught analysts by surprise. The government had been expected to consider bond issues under the Market Stabilisation Scheme and cash management bills, rather than the CRR. The CRR hike drained 3.24 trillion Indian rupees ($47.6 billion) of excessive liquidity.
“Given an expected rebound in IGB yields and interest rates following the withdrawal of excess liquidity due to the incremental CRR, the narrower USIN yield differential could also take some selling pressure off the INR in the near term. However, if the USD continues to strengthen across the board against EM currencies, USDINR will not be able to ‘escape the beta.’ With increased investor apprehensiveness, currency volatility could increase and liquidity become scarcer during bouts of market risk aversion, as the market tests the new RBI leadership’s tolerance for INR weakness.”