Ind-Ra: Improved Macro Landscape; Economy to Grow 7.4%; Headwinds to Remain

India Ratings and Research (Ind-Ra) has revised its FY19 economic growth forecast to 7.4% from 7.1% earlier. From the production side, higher growth in agriculture (expectation of normal rainfall and assumption of even rainfall distribution over space and time) and industrial sectors is expected to push the overall economic growth. From the expenditure side, the boost is expected to come from both private and government expenditure coupled with green shoots emerging in investment spending.

However, the economy is facing a number of headwinds, ranging from the non-performing assets of the banking system and elevated bond yields to increased trade protectionism and tightening global financial conditions. The Reserve Bank of India (RBI) has granted banks the option to spread their provisioning for marked-to-market losses on 'available for sale' and 'held for trading' portfolios for 3QFY18 and 4QFY18 equally up to four quarters. Ind-Ra expects this to provide relief from accounting perspective to banks, which are facing the impact of a sharp increase in G-sec yields.

Despite the status quo by the RBI on policy repo rate since August 2017, yields in the bond market have risen on account of concerns over rising inflation, the central government's fiscal slippage and an increase in state governments' borrowings.

The central government's borrowing plan for 1HFY19, released in March 2018, focussed on (1) a reduction in front-loading of annual borrowing plan, (2) increasing the reliance on small savings' proceeds as a means of funding fiscal deficit and (3) diversifying G-sec issuances (introduced the one-to-four years' maturity bucket, and meeting 10% of budgeted issuances through floating rate bonds and inflation indexed bonds). While this announcement eased the short-term pressure on the debt market, Ind-Ra cautions that higher market borrowings in 2HFY19, if accompanied by adverse fiscal and inflationary developments, could exert significant pressure on the debt market.

Ind-Ra believes the immediate pressure on the RBI to raise policy rates has subsided, as the recent data for both wholesale and retail inflation came in softer than anticipated. Wholesale and retail inflation inched down to 2.48% and 4.44%, respectively, in February 2018 from 2.84% and 5.07% for January 2018. Therefore, the probability of a status quo on policy rates is quite high during FY19.

Ind-Ra believes that the ability of Indian economy to withstand shocks has improved significantly over the past couple of decades and it will be able to do so without having significant impact on growth.

Ind-Ra has published the first edition of its monthly macroeconomics analysis (Arth Samvaad) which covers key domestic and global developments. Apart from the revised macro forecast and heat map of the Indian economy, the report highlights trends in movement of Indian economy with a focus on high frequency growth indicators, inflation trajectory, trade balance, interbank liquidity, credit offtake, interest and exchange rates.

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