Macroeconomic fundamentals remain clouded despite the lower-than-expected shortfall in monsoon rainfall; recent easing of headline inflation; and reform measures announced by Government of India (GoI) in the past two months, said ICRA Research.
To an extent, a narrower-than-expected shortfall in south-west monsoon rainfall has assuaged concerns regarding food inflation. Nevertheless, an anticipated rise in food inflation in the coming months based on an adverse base effect and higher minimum support prices (MSP) for rabi crops would keep inflationary expectations elevated. Despite the considerable slowdown in economic growth over the last 15 months, core inflation remains above 5%.
''In our view, a weaker Rupee and a generalisation of inflationary pressures related to high food prices would result in core inflation remaining firm,'' it said.
ICRA continues to expect WPI inflation to average 7.5-7.7% in FY13. The pace of growth of real GDP at factor cost is likely to have eased to 5.0% in Q2FY13 from 5.5% in Q1FY13. While the weak monsoon onset and late sowing are likely to have dampened yields, heavy rainfall in mid-August to mid-September 2012 may have adversely impacted the standing crops.
The Index of Industrial Production (IIP) indicates a marginal upturn in the growth of the manufacturing and mining & quarrying sectors in Q2FY13. As compared to the forecast of 3% industrial growth in H1FY12, a favourable base effect is expected to boost industrial growth to 5.4% in H2FY13, it added.
Given the absence of a pickup in private investment activity despite an improvement in sentiments; low transmission of the reduction in the cash reserve ratio (CRR) since September 2012; expectations of back-ended cut in the Repo rate (reduction of 50 bps in Q4FY13); and moderating consumption demand, ICRA has revised its forecast for GDP growth for FY13 to 5.4% from the previous expectation of 5.7%.
GoI's fiscal deficit is expected to exceed the revised target of 5.3% of GDP in the current fiscal year, in light of the substantial under-recoveries on various regulated fuels already incurred in H1FY13; limited flexibility to control various types of expenditure; and the likelihood of both tax and non-tax revenue receipts falling short of the budgeted amount.
Notwithstanding the impact of a weaker Rupee on competitiveness, demand for Indian exports is expected to remain muted in H2FY13, reflecting global economic conditions, it opined.
Gold imports are expected to rise in H2FY13 relative to H1FY13, reflecting the festive season demand. Additionally, domestic supply constraints are expected to boost the demand for imports of items such as coal, natural gas and iron ore in 2012-13, enlarging non-oil imports. "We have revised our expectation of the current account deficit for FY13 to USD 70 billion (3.8% of GDP), slightly higher than our previous forecast of USD 69 billion (3.7% of GDP)."
The Repo rate is likely to be reduced by a further 50 bps in the remainder of the current fiscal year, the timing of which would be guided by growth-inflation dynamics. At present, ICRA expects the Central Bank to reduce the CRR by 25 bps in the December 2012 mid-quarter policy review to ensure credit flow to productive sectors.
In the absence of substantial room for monetary easing in FY13 or fiscal space for enhancing public investment to stimulate economic growth, resolution of various regulatory issues and passing of key Legislations such as the proposed Land Acquisition, Rehabilitation and Resettlement Bill is vital to improve sentiments, boost investment activity and ease the supply-side pressures in the Indian economy, it opined.
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