Indian economy likely to expand 7.1 pct in 2017, says Nordea Bank

India’s economy remains in a safe spot. As opposed to anticipations, the demonetisation that was launched in November of last year did not disrupt the Indian economic growth. The fourth quarter’s growth distortion was quite smaller than projected. The economic growth accelerated 7 percent year-on-year, surpassing the expected 6.1 percent growth and just a modest decline from the third quarter. Private consumption had surprisingly contributed largely.

But it is likely that the fourth quarter data have understated the negative effect of the demonetisation. Cash-based informal sectors’ activities such as retail trade are unlikely to have fully captured by national account data, Therefore, there is a good reason to be wary regarding the first quarter 2017 growth data, particularly given the persistent drop in consumer and business sentiment, noted Nordea Bank in a research report.

“We have kept our growth forecast unchanged at 7.1 percent and 7.5 percent for this year and the next”, added Nordea Bank.

Meanwhile the consumer price inflation in the country decelerated to a 13-year low in January 2017 because of a weather-related drop in food prices, and continues to be lower than the medium-term target rate of 4 percent. But the Reserve Bank of India is concerned more about the upside risks to inflation as compared with the downside risks.

The concern of the central bank is not baseless given the close correlation between the CPI and wholesale prices. The wholesale prices had surged to their highest level since the end of 2013. Factors that might accelerate inflation include higher food and other commodity prices, the one-off effects of goods and services taxes, excess liquidity in the banking sector due to the demonetisation and a possible rise in house rent allowances, stated Nordea Bank.

Therefore, the RBI turned hawkish in early April hiking the reverse repo rate by 25 basis points and narrowing the repo rate corridor from the 50 basis points to 25 basis points.