New Delhi: Despite near-term risks of overheating and further rate hikes, India and China would continue to lead the Asian economic growth in the foreseeable future with a possibility of gains in their respective currencies, analysts say.
While concerns are being raised about growth outlook for India and China, the two countries should be able to sustain at least 8% economic growth in the coming decade as they have robust fundamentals and are undergoing continued reforms, global investment banker Citigroup said.
It noted that India is already suffering from overheating symptoms like rising inflation, surging asset prices, growing wage pressure, widening current account deficit and spreading infrastructure bottlenecks.
These concerns have led to repeated monetary tightening policies by the central bank and some modest rate hikes are expected at the current levels as well, but these should not derail the long-term growth momentum, Citigroup’s Asia Economist Yiping Huang said in a report.
Besides, the Indian and Chinese currencies are set for further gains in the future.
“We expect the real effective exchange rate to improve by 22.5% for renminbi and by 16% for rupee over the next five years,” the Citigroup analyst said.
The renewed export and policy risks are clouding rupee’s near-term outlook after a sharp appreciation during the past weeks that has taken it to highest level in nearly nine years.
In case of China, renminbi appreciation has slowed significantly during the past month, after steady gains for several months.
However, with narrowing trade surplus as a key policy objective and Chinese central bank People Bank of China’s tightening policy bias, steady renminbi appreciation is likely to continue.
Moreover, historical trends suggest that these currencies are likely to ride upwards, as long as China and India can sustain strong growth, Citigroup said.
Comparing the two neighbouring economies, the analyst said that while India is plagued by the overstretched supply constraints, China’s risks are mainly on the demand side.
“This is probably the key reason why we see high inflation in India but not in China,” he added.
India has managed to successfully lift its growth rate from 4.5% in the 1980s to 8% currently and the trend might go on if reforms and investment continue to ease resource constraints and promote productivity growth, the report said.
In comparison, the main policy concerns in China are structural issues like over-investment or large trade surplus.
Therefore, if demand could not keep pace with supply, it could lead to overcapacity problems. “For this reason, the latest change in the US trade policy toward China should be a serious cause for concern,” Huang said.