Bengaluru: India’s economic prospects have dimmed since April due to the government’s inability to pass much-needed reforms, a Reuters poll found, but the Reserve Bank of India (RBI) will probably hold rates steady this year as inflation nudges up gradually.
The RBI has already cut benchmark interest rates three times this year to 7.25% and eased credit conditions to boost loan growth and the broader economy, with limited success so far.
The economy is expected to expand 7.6% this fiscal year ending in April 2016, only slightly faster than 7.3% last year, according to the median forecast of 31 economists polled by Reuters. Growth is seen picking up to 8.2% next fiscal year.
Growth forecasts were nudged down from April owing to concerns the government still faces substantial challenges in kick-starting a reform-driven growth cycle, stifling optimism engendered by Prime Minister Narendra Modi’s election win over a year ago.
“Restarting of stalled projects were expected to jump-start the investment cycle, alongside stabilization in consumption and higher public sector spending to boost overall growth,” said Radhika Rao, economist at DBS in Singapore.
“However, a delay in the passage of crucial reforms, high financing costs and a stressed banking sector have hurt the government’s plans.”
India’s parliament has just begun a session in which Modi is seeking to pass major legislation that would unite the whole country into one tax zone and make it easier for businesses to procure land.
Strong opposition from rival parties coupled with the ruling coalition’s minority in the upper house, however, means it could prove difficult for any consensus to be reached.
Slowing growth expectations may warrant calls for the RBI to ease policy again. But with its mandate to keep inflation below 6% over the medium-term, and consumer prices expected to rise 5.3% this year and 5.5% next, that is easier said than done.
While a slight majority predict there will be no further easing by the RBI, as risks to inflation from poor monsoon rains of the last few weeks remain high, 14 of 31 analysts polled this week called for one more cut in the final months of 2015.
In a survey last month, when an initial spell of good rains prompted positive sentiment amongst analysts, a large majority expected another cut this year.
But the latest consensus trimmed 25 basis points off the repo rate to 7% only in early 2016 and another just before moving into 2017.
Monetary policy easing in India puts it out of step with the US, the world’s largest economy, where interest rates are expected to rise later this year, perhaps as early as September.
India’s situation, however, is much better than emerging market peer Brazil, where the central bank has been jacking up interest rates to fight off high inflation even as the economy slips into a deepening recession. Reuters