India Country Primer. Bloomberg India’S Steady Recovery to Face an Election Challenge Intelligence
Total Page：16
File Type：pdf, Size：1020Kb
A Bloomberg Professional Services Offering Bloomberg Terminal India country primer. Bloomberg India’s steady recovery to face an election challenge Intelligence Abhishek Gupta Economist Bloomberg Intelligence Contents The latest 01 Growth 02 Inflation 02 Policy 03 Forecasts 04 Research 06 News Growth & inflation 06 Supply 08 Demand 09 Inflation Policy & structural 10 Fiscal policy 10 FX Forecast 11 Reform India country primer. India’s steady recovery to face an election challenge (Bloomberg Intelligence) The Indian economy is returning to a slow and steady recovery. Although not evident in official year-on-year GDP data, our monthly GDP tracker adjusted for base effects shows that the recent pullback in oil prices and improving liquidity conditions are aiding growth. The new governor, Shaktikanta Das, has also turned supportive of growth, giving up his predecessor’s hawkish bias. That, along with a tailwind from structural reforms of the past few years, should support a gradual economic recovery. Still, national elections around May 2019 pose a short-term risk. Another term for Modi’s government would bode well for further reforms and market sentiment. A win for a united opposition led by the Congress and composed of smaller regional parties with different ideologies could hurt near term economic and financial stability. The latest Growth India’s Growth Slowdown Calls for Monetary Policy Support: The downtrend in India’s GDP growth during October-December was largely driven by an unreasonably tight monetary policy and fading favorable base effects, in our view. Monetary policy has already made a U-turn under new RBI Governor Shaktikanta Das and we expect the central bank’s policies to be supportive of growth ahead. Adjusted for base effects, our monthly GDP tracker for January already shows an improvement in the pace of the recovery. GDP expanded 6.6% year on year in 3Q of fiscal 2019, below the revised down 7% reported for 2Q. For full fiscal 2019, the government lowered its second advance estimate of GDP growth to 7% from an earlier estimate of 7.2%. Looking ahead, we expect GDP growth to recover to 7.5% in fiscal 2020 from an estimated 7.1% in fiscal 2019. GDP Growth Likely Hits Bottom, To Rebound Ahead Source: Ministry of Statistics and Programme Implementation, Bloomberg Economics India country primer. Bloomberg Intelligence Inflation RBI Needs To Lower Rates To Lift India’s Benign Inflation: A pickup in India’s headline inflation in February should be treated with caution given it was largely driven by comparatively low food prices last year. More importantly, a marginal drop in core inflation signals that inflationary pressures may actually be easing. In our view, there’s an urgent need for a looser stance by the Reserve Bank of India to lift inflation to its target level, allowing growth to achieve the economy’s higher potential. Consumer prices rose 2.57% year on year in February, up from 1.97% in January. Core inflation eased to 5.09% from 5.14% in January. Looking ahead, we expect food prices to move out of deflation and pull up headline inflation. Even so, economic slack is likely to pull down core inflation as output growth stays below potential and input cost-price pressures remain subdued. Inflation Remains Below RBI’s 4% Target Source: Bloomberg Economics, Reserve Bank of India Policy India’s Central Bank Cuts, Drops Hawkish Bias — Now Data Driven: The Reserve Bank of India put to rest its hawkish bias with a rate cut in February. This change in policy course — the first with Governor Shaktikanta Das at the helm — restores growth maximization as a secondary objective of the RBI. It also signals a commitment to a symmetric policy to achieve its primary objective of 4% inflation target. That’s a departure from the RBI’s previously one-sided, conservative stance that aimed to keep inflation below target. In our view, the rate cut should stop the upward trend in deposit and lending rates, and support a gradual recovery. The monetary policy committee cut the repo rate by 25 bps to 6.25% in a 4-2 decision, but was unanimous in shifting back to a neutral stance from calibrated tightening earlier. Members Chetan Ghate and Viral Acharya voted against the rate cut. 2 India country primer. Bloomberg Intelligence Forecasts India Forecast Summary: Gradual Growth Recovery Ahead We expect GDP growth to gradually recover to 7.5% in fiscal 2020 from an estimated 7.1% in fiscal 2019. Lower oil prices, improving liquidity conditions, lower bond yields and recent fiscal and monetary policy stimulus should support a cyclical recovery. Reforms in recent years are expected to provide a structural boost. We also anticipate RBI will support growth with two more 25 bp rate cuts, the first in April when we expect a shift in its stance to accommodation. The second will follow in June or August. Those two RBI rate cuts are consistent with the central bank’s primary objective of maintaining 4% inflation on a durable basis and its secondary objective of maximizing growth. In terms of the rupee, we believe the recent strength likely has some more room to run, especially if oil price stays around $65 per barrel. India Economic Forecasts Source: Bloomberg Economics Our view Two RBI Rate Cuts Ahead; Consensus Expects One: The consensus view among economists is for one rate cut in April, followed by a long pause. We think the consensus underestimates the need for a looser stance by the RBI to lift inflation and allow growth to catch up to the economy’s higher potential. Our prediction that the RBI would pause at its October and December policy reviews and cut rates in February proved correct. Our view is that the RBI — now on a data- dependent path — will need to lower rates further than the consensus expects. We expect the central bank to deliver two more 25 basis point reductions — the first in April. Given the easing cycle is likely to be shallow, it’s possible the RBI sticks to its neutral stance while delivering further cuts. RBI Policy Repo Rate Forecast Source: Bloomberg Economics, Reserve Bank of India 3 India country primer. Bloomberg Intelligence Research India’s Balance of Payments Swing to Surplus Lifts Rupee: India’s balance of payments is swinging into surplus, ending a three-quarter string of deficits — and helping to strengthen the rupee. The swing is being driven by an improvement in the current and the capital account balances. Lower current account deficit is largely due to a drop in crude oil prices, besides favorable trade seasonality and higher worker remittances. The return of portfolio inflows on the capital account, in our view, is likely due to an easier policy stance by the Reserve Bank of India. We estimate the balance of payments to post a surplus of $5.5 billion in 4Q fiscal 2019, shifting from an estimated deficit of $6.1 billion in fiscal 3Q. For fiscal 2020, we forecast a balance of payments surplus of $10.7 billion as our base case. Balance of Payments to Flip to Surplus Source: Bloomberg Economics, Reserve Bank of India India’s Modi may gain in polls on Pakistan terror stand A tough stance against a threat from Pakistan-based terrorists has won Prime Minister Narendra Modi praise from the Indian public. In our view, that could translate into electoral gains for him and his Bharatiya Janata Party in national elections in May. Political continuity would bode well for structural reforms and bolster market sentiment. The economy has achieved higher potential growth following sustained periods of structural reforms, according to our analysis. The boost to actual growth, though, only occurs after a lag. Modi’s structural reforms came at a cost of a slowdown in growth, but we expect the economy to start recovering next year. In our view, the reforms have raised India’s growth potential to 8-8.5% — and actual growth is set to catch up. 4 India country primer. Bloomberg Intelligence More RBI rate cuts ahead to stoke India’s growth recovery The Reserve Bank of India needs to reduce rates further, and we expect it to move again at its April review. Inflation continuing to undershoot its target, growth below potential, and underlying price pressures set to ease all warrant more accommodation after February’s rate cut. We now expect the RBI to deliver two more 25 basis point reductions. The first will come in April, the second in June or August. The monetary policy committee, under the new leadership of governor Shaktikanta Das, is now signaling a dovish tilt for the first time since a committee structure was adopted in September 2016. That should allow the RBI to deliver more data-dependent rate cuts to support a growth recovery ahead. MPV Turns Dovish, Sheds Hawkish Bias Source: Bloomberg Economics India’s corporate bond sales perk up at last on RBI shift An 18-month skid in India’s corporate bond sales growth came to a halt in January, according to our tracker of outstanding issuance. Growth in bank credit, which accounts for nearly three- quarters of funding extended to firms, also picked up — boosting combined credit growth. The marginal pickup in growth of corporate bond issuance likely reflects a U-turn in the central bank’s policy away from a hawkish bias. The Reserve Bank of India started to inject more durable liquidity last November, and markets gradually started to anticipate a rate cut that the RBI delivered at its February review. This has now stalled an increase in bank deposit and lending rates, which was underway since last year.