1Q2019: India’s Quarterly Economic Outlook
Combination of weak growth and lower inflation hints at rate cut(s)
16 January 2019
The Economy Observer
After witnessing extreme volatility in mid-2018, the financial markets were relatively calm towards the year-end,
despite the unexpected loss of the BJP in three major state assemblies. The NIFTY index grew over 8% YoY (and ~5%
QoQ) in 3QFY19 (or 4Q2018), while the benchmark bond yield declined from over 8% at Sept-end to 7.5% currently,
and the Indian Rupee (INR) corrected from ~74 against the US Dollar (USD) to sub-70.
The volatility in crude oil prices has certainly aided these movements. When compared with our
retained our growth forecasts but sliced inflation and current account deficit expectations. Further, with the
materializing of weak growth and lower inflation in 2HFY19, we believe the Reserve Bank of India (RBI) could deliver
one or two rate cut(s) amounting to 25-50bp in early 2019. This hinges on the assumption that the government will
resist expensive populist schemes ahead of the 2019 general elections and maintains a path of fiscal consolidation.
What has changed since the
Quarterly Economic Update?
After posting record high growth (in eight quarters) of 8.2% YoY in
real GDP growth decelerated sharply to 7.1% in
which was a
negative surprise to market participants, but in line with our non-consensus
expectation. Accordingly, negligible revisions were made in our growth forecasts –
at ~7% each for FY19 and FY20.
We have revised down our
full-year FY19 forecasts
again, from the earlier 4.1%
to 3.6% currently
The headline CPI-based inflation has been the biggest surprise this
year. With six successive lower-than-expected readings, we have revised down our
full-year FY19 forecasts again from the earlier 4.1% to 3.6% currently. With the
inflation reading expected to remain sub-4% by Mar’19 and real GDP growth at
~6.5% YoY in 2HFY19, we expect the RBI to deliver a rate cut next month assuming
there is no fiscal profligacy in the run-up to the 2019 general elections.
Foreign trade and exchange rate:
With crude oil prices swinging wildly from
USD85/bbl in Oct’18 to about USD60/bbl currently, fears of very high current
account deficit (CAD) have also receded. We have revised down our CAD forecasts
from earlier 2.9% to 2.4% of GDP for FY19. However, we expect the economy to post
a deficit on its balance of payments (BoP) in FY19. Accordingly, the INR forecasts
have not changed materially and are likely to average 70.4 against the USD. It is
expected to stay in a narrow range of 69.5-71.5 in 4QFY19.
Forecasts of key macroeconomic variables for the Indian economy
Consumer price index (CPI)
Policy repo rate (year-end)
Current account balance
% of GDP
% of GDP
Source: Various national sources, MOSL
– Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
– Research analyst
(Rahul.Agrawal@motilaloswal.com); +91 22 6129 1559
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