Amongst emerging markets, India is one of the few bright spots. Even though the economic growth has decelerated slightly in recent times, it is still strong at around 7%. India is gaining from lower oil price, while rebounding domestic and external balances have left room for monetary and fiscal policies to ease.
India’s relatively strong government has also speeded up structural economic reforms to certain extent, although not as much as hoped for. In the coming years, India’s economy is expected to grow more than 7%. The country’s current account deficit has dropped noticeably to below 2% of GDP and should drop further because of sharp fall in the crude oil price.
India’s central bank, the Reserve Bank of India (RBI), shifted its focus in March 2015 from targeting wholesale prices to consumer price inflation within 4% +/-2%. This is a slow adjustment and for January 2016 the target was below 6%. At present, inflation is safely below the target rate at 5.2%. Low inflation gave room for the central bank to lower rates by 50bp to 6.75% in late September of 2015. RBI is likely to keep rates on hold, although further cuts cannot be ruled out to support growth.
INR is expected to remain under pressure against the US dollar, consistent with other emerging market currencies. However, it is not one of the fragile EM currencies any more. The current account has recovered significantly and the country is gaining from lower oil price. RBI is also boosting sentiment in the Indian economy.
“In 2016, gradual monetary tightening in the US and continued depreciation of the CNY could weigh further on the INR and we look for a further depreciation of around 5% in 12M”, says Danske Bank.
