'Growth to rebound to 7.5% in FY19; slim chance of rate hike'

12/02/2018 17:10

India's economy will accelerate to 7.5 per cent in 2018-19 and there is a slim chance of the much-feared rate hike by the central bank in the near-term as inflation risks abate, says a report.

The economic momentum in the current financial year was affected by temporary disruptions on account of demonetisation and GST implementation but a rebound in the next financial year is likely, the Deutsche Bank report said today.

"We remain optimistic about a growth rebound in FY19.

We are currently forecasting 7.5 per cent yoy real GDP growth for FY19," it said. It further noted that the next few months will be critical to assess the shape of growth recovery, direction of global oil prices, forecast of summer monsoon, the extent of increases in minimum support prices, and the degree of volatility in global financial market markets. Under Deutsche Bank's base case scenario, policy rates are likely to remain steady at 6 per cent through 2018, which would help the growth recovery to gain traction and sustain in the quarters ahead.

"The central bank is not willing to jump into a rate hike cycle in a hurry, unless inflation risks rise materially from current levels," it said, adding that the Reserve Bank of India will stay on hold for a longer period. "However, if the RBI embarks on a premature rate hike cycle, then growth could turn out to be lower than currently anticipated," it added. Growth bottomed in April-June 2017 (5.7 per cent) and has started stabilising since July-September 2017 (6.3 per cent), albeit at a modest pace. As per the report, growth momentum is expected to accelerate further in the December and the March quarters, as reflected in the uptick in leading high frequency indicators such as PMI, industrial production, core infrastructure production and exports. "Prospect of higher global oil prices, a negative monsoon outcome and stagnation in global growth recovery remain key risks to our baseline forecast of growth improving to 7.5 per cent in FY19," the report noted.

The brokerage said the headline inflation will cool down to 5 per cent for January from 5.2 per cent in December and will cool down further from July onwards on a lower base. On the impact of a wider fiscal deficit number, it said the RBI "seems to be giving a lower weight at this stage to the potential inflationary risks that could arise due to fiscal slippages".