1. ‘Adaptive RBI policy can lift India’s growth to 7.6%’

‘Adaptive RBI policy can lift India’s growth to 7.6%’

But lack of reforms can derail medium to long-term prospects, says Moody’s Analytics

By: | New Delhi | Updated: July 31, 2015 12:49 AM

An accommodative monetary policy would lift India’s economic growth to 7.6% in 2015 and 8% in 2016, but lack of reforms could derail medium- to long-term growth prospects, Moody’s Analytics said in a report on Thursday. “We expect at least one more benchmark rate reduction in 2015,” Moody’s Analytics, a division of Moody’s Corporation, engaged in economic research and analysis, said. The RBI  is scheduled to review monetary policy next on August 4.

However, it cautioned that tampering with the RBI’s independence would hurt the country’s economic prospects.

Thanks to low inflation rate and better external balances, the RBI cut repo rate by 75 basis points to 7.25% in three tranches of 25 bps each in 2015. “There could be two more 25-basis point rate cuts in 2015,” Moody’s said, ascribing the prediction to rainfall deficit being not as large as expected earlier and curbing of food inflation.

Moody’s singled out political infighting for denting business confidence in the country. Without a majority in the Upper House, the ruling BJP might not be able to get Parliament approval for key reforms such as the land acquisition Bill, flexible labour laws and the goods and services tax later this year or even 2016, it said.

Foreign firms are wary of investing in India as lengthy delays in acquiring land tend to stall projects. South Korean steelmaker Posco’s long-proposed $12 billion plant in Odisha was on the verge of being scrapped due to issues related to land acquisition.

If reforms are not delivered swiftly like in China, it said, India’s economic growth may not rise above 7.5% even though it has the potential to grow near 10%. The Indian economy grew by 7.3% in FY15.

Manufacturing, touted by the Narendra Modi government as the way to drive growth, was not doing well. Purchasing Managers’ Indexes have dropped for both manufacturing and services in the past several months due to reforms vacuum, it said. “Partial demand indicators confirm our suspicion that India is operating under a negative output gap,” Moody’s said.

The biggest hurdle was lack of private investment, which has declined amid stalled infrastructure projects and rise in bad loans, it said.

Despite a lack of reforms, credit growth would likely accelerate in the coming quarters thanks to lower interest rates as banks continue to pass on the RBI’s rate cuts this year.

It said RBI’s monetary policy under the helm of governor Raghuram Rajan has been effective with inflation under control, improvements in external accounts and the economy was poised for further rate cuts.

However, it said a proposal in the draft Indian Financial Code that a seven-member monetary policy committee with four members picked by the government to vote on interest rate decisions, could undo RBI’s good work. It would also remove the governor’s veto power.

Tampering with the central bank’s independence would make it difficult to anchor inflation expectations, hurting country’s economic prospects, Moody’s said.

Highlights
* Private investment remains elusive, and partial indicators point to a negative output gap
* Better rains, lower commodity prices, and strong external balances increase the odds of further interest rate cuts
* Tampering with the RBI’s independence would hurt India’s economic prospects
* Moody’s singled out political infighting for denting business confidence in the country
* Foreign firms are wary of investing in India as lengthy delays in acquiring land tend to stall projects
* If reforms are not delivered swiftly like in China, India’s economic growth may not rise above 7.5%

  1. A
    Arif Amiri
    Jul 31, 2015 at 6:04 am
    Good article RBI
    Reply

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