India's real GDP growth slowed further to 4.5% y-o-y in Q2 of FY2019/20 (April-March), from 5.0% y-o-y in the first quarter, mainly owing to a collapse in investment
growth, which outweighed soft recoveries in private and government consumption. In light of a softer than expected first half, in addition to a weak growth outlook
over H2 FY2019/20 it is anticipated that FY2019/20 full-year growth forecast is to 5.1%. Expecting continued economic weakness tobe owing to weak private consumption growth as well as weak gross fixed capital formation growth. That said, one can expect robust government consumption growth and an improving net export contribution (owing to a sharper fall in imports growth than exports) to prop up growth over the second half of the fiscal year.
The RBI held its benchmark repurchase (repo) and reverse repo during its December 5 monetary policy meeting at 5.15% and 4.90%, respectively. Forecast says the RBI's repo and reverse repo rate to fall by 40bps to 4.75% and 4.50%, respectively, by the end of FY2020/21 (April-March), with risks to our policy rate forecasts weighted to the downside. Rising inflationary pressures would constrain the central bank's ability to ease further to stimulate growth over the near term, given its mandate to keep inflation below 6.0%. However, it can be believed that the RBI will eventually prioritize growth in this cycle, given the transitory nature of high food inflation, and ease further in 2020 following more clarity around fiscal support from the FY2020/21 (April-March) Union Budget due in February 2020.
India's central fiscal deficit is forecasted to come in at 3.6% of GDP in FY2019/20 (April-March) reflecting the expectation for a larger slippage versus the government's 3.3% target. We believe that this will mainly be due to weak revenue collection as a result of sluggish economic growth and the government's sweeping corporate tax cut in September amid no intention to reduce fiscal spending.
The Indian rupee can be expected to remain on a long-term weakening trajectory against the US dollar, and average INR73.00/USD in 2020 and INR75.00/
USD in 2021 (revised from INR74.00/USD and INR76.00/USD respectively). Over the short term, a narrowing nominal interest differential with the US and worsening
terms of trade will weigh on the rupee. The central bank's focus on growth will likely also see it favor a weaker rupee to support export competitiveness. Over the
longer term, it can be expected that the rupee's overvaluation and structurally higher inflation relative to the US to exert downside pressure on the currency.
For More information
Download the complete report Here
Source: Fitch Solutions Inc