India: Betting on an upswing

India’s financial leaders are optimistic that Asia’s third-largest economy will see a cyclical upswing after its recent interest rate cut.

Asia Unhedged certainly hopes so.

The Reserve Bank of India started June with its third rate cut of the year. The central bank cut its key repo rate to 7.25% from 7.5%, taking advantage of subdued inflation to support economic growth. In the first quarter, the Indian economy grew 7.5% compared with the year-ago period, and topping the 7% growth posted by China.

This is good news, but we think India still needs to compete more effectively against shifting geopolitical factors and competition.

“We’ve already had 75 basis points of interest rate cuts,” junior Finance Minister Jayant Sinha said Thursday during a speech at an industry event. “We are going to see that cyclical upswing that happens when rates come down and inflation is under control. So that’s the first growth driver.”

Meanwhile, the RBI also released on Thursday its Financial Stability Report 2015. In it, Reserve Bank Governor Raghuram Rajan wrote that the country’s economy has rebounded over the past two years, but that moves by other central banks, specifically the US Federal Reserve Bank, could create more volatility.

“The macro-economic fundamentals have improved and we have also been able to build buffers to fight any future uncertainty,” he said, adding that “we need to be vigilant.”

Focusing on the “taper tantrums” that began in 2013 when the Fed hinted at reversing its easy money policy, Rajan said, “With back-to-back quantitative easing by other major central banks, alongside the possible tightening by the Fed, what we have seen might be only one of a series of such ‘tantrums’ that the global markets are likely to witness.”

“There is a need to be vigilant about the spillovers (of the Fed ending the near-zero interest rate regime),” said Rajan. “For India, what matters is reducing inefficiencies as also improvements in non-price competitiveness.”

FSR is published by a sub-committee of the Financial Stability & Development Council headed by the RBI Governor.

Categories: Asia Unhedged, South Asia

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  • Mr. Bernard Wijeyasingha

    A few issues that would effect India’s growth:
    -India has to achieve around 8% growth rate and sustain it for many years in order to absorb her massive population of workers, especially the growing middle class.
    -India is an export driven economy, and is subject to the vicissitudes of the consuming economies, especially the US, China, the EU to the Middle East. Now here is the rub. The US economy is actually shrinking. The EU is in deep financial trouble. if one goes by Greece and before that, Spain, Portugal to Italy the economic problems of the EU are not being fully dealt with. This band aid method will not hold. That does not even take into consideration the hot war between Moscow and the US/NATO is being waged in Europe (in addition to Syria, Lebanon and Iran).
    -China’s economy has slowed down from 10% to 7%. That is a massive contraction. -The Middle East, for various reasons ranging from global crude oil dropping, the unrest of ISIS and the Kurdish nationalist movement, to the rising nuclear state of Iran are placing a region so vital to the world, on rocky ground. It will effect the millions of Indian migrant workers in that region.
    If it does that would cut off important foreign remittances to India and India will face the specter of those migrant workers returning to India seeking jobs.
    -India cannot revert to a consumer based economy. The goods she exports cannot be absorbed at the price they are sold, by the Indian consumer.
    I will not go into other issues of social unrest, which is climbing, or what would be the result if India simply cannot achieve a growth rate fast enough and long enough to absorb the hundreds of millions now seeking a job