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MNI (London)
--India FX And Bond Sell-Off Not Seen Sustainable
By Stuart Allsopp
     SINGAPORE (MNI) - India's rapid real GDP growth of 7.2% y/y seen in the
third quarter of fiscal year 2018 is likely to be sustained into fiscal 2019
thanks to the government's infrastructure drive, along with a surge in
profitability as the Goods and Services Tax and demonetisation headwinds fade,
allowing a pickup in capex. The sell-off in the Indian rupee and bond yields is
unlikely to continue, given the improving outlook.
     Two negative developments seen in the economy over the past month -- the
high-profile bank fraud at state run Punjab National Bank and the government's
decision to increase import tariffs to support domestic manufacturing -- pose
varying degrees of risks, but are unlikely to prevent growth from exceeding
     Strong growth momentum in the manufacturing and construction sectors
suggests that headline growth will likely continue to outperform the rest of the
region, with the government's infrastructure push a key supportive near-term
factor. The government is letting its fiscal consolidation efforts take a
temporary back seat in favour of boosting transport infrastructure, which will
contribute positively to headline real GDP.
     With the teething issues surrounding GST implementation and the
demonetisation campaign having being almost fully worked through, corporate
earnings have surged and this should provide a solid platform for increased
gross fixed capital formation. GFCF expanded by 12.0%y/y in the third quarter
and is likely to end fiscal year 2018 on a strong note.
     The PNB scandal has hit investor confidence as seen by the underperformance
of the Indian rupee and equities, and Goldman Sachs on Mar 20 shaved 0.4pp from
its real GDP growth forecast for the upcoming fiscal year. The reason given was
that an anticipated tightening of banking sector regulations would impede the
recovery in credit growth seen over the past year.
     However, low loan growth tends to be little impediment to real GDP growth
outside of periods of outright banking crises. India's real GDP growth saw a
strong accelerating trend from 2012 to 2016 while credit growth consistently
slowed. With loan growth coming in at 11.5% y/y in February there appears to be
no shortage of new liquidity to facilitate strong growth. Increased regulation
should actually help to improve resource allocation among India's state-run
banks, helping to boost productivity.
     The increase in import tariffs, on the other hand, represents a more
pertinent risk to real GDP growth, although from a longer-term perspective. Even
assuming that retaliatory measures are not taken by India's trade partners, the
decision to impose tariffs on a wide range of industrial products to support its
'Make in India' campaign will ultimately be negative for productivity and thus
corporate profitability and economic growth. Any gains received by domestic
manufacturers will most likely be more than offset by losses in other industries
reliant on imports.
     At this stage, such measures do not appear to mark a change in tack by the
central government regarding its goal to improve economic freedom and roll back
regulations, and we therefore do not expect to see the trend of a weakening
rupee and rising bond yields continue. That said, a move towards further
protectionist policies would be a negative signal. 
--MNI Singapore Bureau; +65 8233 2326; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
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