Moreover, the MPC’s forecast of inflation at 5.0 per cent for Q1 FY2020, which is well above its medium-term target of 4.0 per cent, suggests that another rate hike of 25 bps towards the end of FY2019 should not be ruled out, notwithstanding the neutral stance of monetary policy.
The recent rupee depreciation would support exports, although the heightened risk of trade wars poses a concern. Overall, Icra expects the GDP
growth to record a shallow recovery to 7.1 per cent in FY2019 from 6.7 per cent in FY2018.
The initial trends for the fiscal deficit
of the Government of India appear favourable, with a mild year-on-year decline in Q1 FY2019. However, various concerns persist, including whether the targets for revenues related to the GST, dividends and profits, and disinvestment would be realised, and whether the budgeted outlays for revised MSPs, the National Health Protection Scheme, fuel and fertiliser subsidies, and bank recapitalisation would be adequate.
While a fiscal slippage in FY2019 may not necessarily arise, there is a risk that capital spending would be curtailed to prevent breaching the fiscal deficit
targets. The size of the market borrowing for both the states and Central Governments for H2 FY2019 would be closely watched, and would influence bond yields.
Additionally, movements in global crude oil prices would impact inflation, the fiscal situation and the current account deficit, transmitting rapidly into Indian bond yields as well as the trend in the INR relative to major currencies.
The widening of India’s merchandise trade deficit to a 61-month high in June 2018, has fuelled concerns regarding the outlook for the current account deficit. Given the current level of commodity prices, Icra expects the merchandise trade deficit to widen significantly in FY2019. However, the services trade surplus and remittances are likely to improve, benefitting from a weaker currency. Overall, the current account deficit is likely to increase to 2.5 per cent of GDP
in FY2019 from 1.9 per cent of GDP in FY2018.
To conclude, while recent indicators point toward a positive momentum in Indian economic growth, there are growing concerns regarding its sustainability at these levels, given the outlook for inflation and the twin deficits in the current fiscal.
Our baseline expectation is that Indian GDP growth would be around 7.1 per cent in FY19, lower than the MPC’s forecast, and the current volume growth being displayed by sectors such as automobile, cement and coal production, as well as credit and deposit growth. Nevertheless, India would probably remain one of the fastest growing large economies in the world.
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.