Amongst BRIC nations, India is the only country that is not struggling to keep growth at desired levels. However, slowing global economy has impacted India, according to Nordea Bank. The country’s exports have contracted, while imports have dropped to a comparable magnitude. Hence net exports have almost contributed nothing to the economic growth in 2015.
As global trade is likely to remain weak, India requires depending on domestic demand, added Nordea Bank. The steady pace of reforms is expected to boost investment that will then increase private consumption, wages and production, noted Nordea Bank.
“We have fine-tuned our growth forecasts to slightly more than 7.5% for the coming two years”, says Nordea Bank.
India’s industrial sector contributes just 30% to the GDP, as compared to the service sector. This is partially why the country has lower labor productivity than its peers in Asia. Meanwhile, the Reserve Bank of India lowered rates to 6.5% in early April to avoid the strong headwinds in the global economy from impacting the domestic activity of the country.
However, the central bank is unlikely to further lower rates in the remainder of 2016 because of two risks on the upside to RBI’s inflation forecast of 5% for 2016, noted Nordea Bank. Firstly, the country is expected to have a third consecutive year of poor monsoon rains that might accelerate food prices. And secondly, public servants will receive an increment of around 24% in salary in 2016.
The central bank aims to keep positive real deposit rates of 1.5%-2%. Furthermore, the RBI has undertaken many actions to rebound rate transmission, such as a closer link between policy rate and lending rates. The central bank has lowered rates by a total of 150 bp in the past 15 months; however, the major banks have only passed on 55bp to their consumers. Therefore, the central bank is expected to wait and watch if the rate transmission is better before mulling lowering rates again, added Nordea Bank.