Rising inflation is expected to keep the Reserve Bank of India from cutting rates again until late this year, while an expansionary federal budget due next month attempts to put a floor under rapidly-slowing growth, a Reuters poll found.
Last month a rate cut at the Feb. 4-6 meeting was a close call but with the latest inflation print showing a sharp increase - accelerating to its highest in more than five years and above the upper band of the RBI’s target range - the central bank will be forced to stay on the sidelines.
That is despite the Indian economy expanding at its weakest pace in over six years in the July-September quarter and the Jan. 17-22 poll of nearly 65 economists showing a sharp cut to the growth outlook for this fiscal year.
“Our expectation is that there might be higher inflation prints at least until April beyond which you could see some moderation,” said Sakshi Gupta, senior India economist at HDFC Bank.
“Given this trajectory, it would reach a stage where inflation prints are going to become more comfortable for the RBI, we expect them to seize that opportunity and cut to support growth.”
Still, in response to additional questions, all 42 economists said growth would gradually pick up in the next six months and a majority said inflation would moderate.
“A sharp pullback in credit caused growth to slow dramatically in 2019. But fiscal and monetary policy have been loosened, this should lead to a gradual recovery in investment and household spending,” said Shilan Shah, senior India economist at Capital Economics.
While the RBI was the most aggressively dovish major central bank in Asia, slashing rates by a cumulative 135 basis points last year, it paused unexpectedly in December on inflation concerns.
The latest poll projected the central bank to extend that pause - keeping its repo rate on hold at 5.15% at its February meeting and until at least October.
“Going forward, inflation is going to stay at least above target for the next 6-8 months. So, there will be very limited room for them to return to an easing bias soon in terms of cutting rates,” said Radhika Rao, economist at DBS.
The RBI was forecast to next cut rates by 25 basis points to 4.90% in the October-December quarter, according to the poll consensus.
Gross domestic product growth was forecast to average 5.0% this fiscal year, the lowest since polling began for the period in April 2018.
If that is realised, it would line up with the RBI’s projection and mark its weakest pace since the financial crisis.
On Monday the IMF slashed India’s prospects to 4.8%, making its biggest cutback for any emerging market.
The economy was then expected to expand 6.0% next fiscal year, a downgrade from 6.8% predicted in the October poll.
Expansionary budget
With the RBI not predicted to provide an additional boost over the near term, the government was expected to announce more expansionary measures at its Union Budget on Feb. 1, rather than focus on fiscal prudence, according to 30 of 50 economists who answered a separate question.
The government was forecast to set a fiscal deficit target of 3.6% of GDP for 2020/21, up from 3.3% targeted for the current year, the poll found.
“Given the protracted and broad-based slowdown of the Indian economy, we opine the government will undertake fiscal expansion to boost the economy,” said Sher Mehta, director of macroeconomic research at Virtuoso Economics.
While fiscal expansion is generally followed by a spike in price pressures, a majority - over 60% of 39 respondents - said it would not prove to be inflationary.
Virtuso Economics’ Mehta said “with the marked downturn in consumption demand and the likelihood of a large stimulus limited, we don’t expect fiscal expansion to be inflationary.”
