India chart book – Volatility overshadows growth

Rising rates and dollar, China-US trade friction, high oil prices and geopolitical unease have resulted in a broader sell-off.
Radhika Rao15 Oct 2018
Photo credit: AFP Photo

• Benign food inflation gave the RBI space to keep rates on hold this month. We revise down our CPI forecast a notch. Guidance suggests policy remains centered on the inflation mandate and is not targeted at currency management.
• Inflation might not be a concern (besides core), but currency and oil prices are unknowns. We retain the possibility that weak global cues might need to be defended by one-two hikes in rest of FY19.
• Rising rates and dollar, China-US trade friction, high oil prices and geopolitical unease have resulted in a broader sell-off. Indian equities which had, erstwhile, been resilient to rising yields, have narrowed this year’s gains.
• There have been a mix of liquidity boosting steps and intervention by the RBI. The government is talking up the rupee, backed by import curbs to contain the current account deficit at 3% of GDP and emphasizing on fiscal consolidation.
• A non-resident deposit/ bonds scheme is under consideration. Its success in calming markets will hinge on an improvement in the external environment, akin to 2013.
• Growth momentum has been resilient yet far. The trend is likely to face speedbumps in H2 FY19 but will still be amongst the fastest in the region. Base effects, moderation in government spending, tighter financial conditions and a wider trade miss might slow growth to 7-7.5% by end-FY19. CAD is seen at -2.7% of GDP, with any miss in the fiscal deficit to be contained at -3.4-3.5%.
• We look for the USDINR to head towards 75.0 factoring in our base case of at least four hikes by the US Fed over the year, which will be dollar and rates positive. OMOs have supported domestic bonds, but concern over borrowings and cautious banks/ FPIs, might leave 10Y yields back up at 8.1-8.2% by end-year.

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Radhika Rao

Economist - Eurozone & India

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