Five months after the Iran war raised fears of an inflation spike and economic downturn, Indian officials are sounding more confident as the worst of those concerns have so far failed to materialise. According to reports from The Hindu BusinessLine and NDTV Profit, inflation picked up slightly last month but remained within the Reserve Bank's 2 per cent-6 per cent tolerance band, as data released Wednesday showed. Consumer demand has also held up, with vehicle sales at record levels, credit growth climbing to a two-year high and GST receipts rising at a double-digit pace. The resilience is a welcome surprise for an economy that had appeared particularly vulnerable to the surge in oil prices triggered by the conflict, with the outlook less precarious than it appeared in March. While questions remain over the durability of growth — and monthly indicators can be volatile — the outlook is less precarious than it appeared in March.
Governor Sanjay Malhotra reflected this shift in confidence this week, pointing to resilient growth, inflation "more or less under check," healthy corporate balance sheets and a "robust" external sector as reasons for optimism. As reported by The Hindu BusinessLine and NDTV Profit, Malhotra said at a banking conference in Mumbai that "what is amazing and what's important to keep in mind" is that India emerges "much stronger" from every crisis. A majority of economists expect RBI policymakers to leave interest rates unchanged at 5.25 per cent this year even as inflation is forecast to pick up heading into the festive season. The optimism is particularly significant given that the central bank has historically been cautious about disrupting consumption momentum during the October-December period.
The optimism was evident in the latest earnings season, with India's largest consumer-goods maker, Hindustan Unilever, saying fears of an "inflation-led impact" on demand hadn't materialised, while Britannia Industries described the environment as "strong." According to The Hindu BusinessLine and NDTV Profit, Mahindra & Mahindra reported "very strong demand momentum" across urban and rural markets, with recent price increases having little effect, while TVS Motor pointed to resilient spending in rural and semi-urban areas. As India enters the festive season culminating in Diwali, businesses are building inventories, ramping up production and adding temporary workers in anticipation of a demand pickup. The corporate resilience is particularly notable given the initial concerns about inflation's impact on consumer demand.
"Festive-season demand this year will be robust," said Soumya Kanti Ghosh, chief economic adviser at State Bank of India Group, which expects India's economy to expand 8 per cent in the April-June quarter. As reported by The Hindu BusinessLine and NDTV Profit, Ghosh noted that "as long as consumption is not debt-fueled, the RBI will not want to spoil the momentum." Debopam Chaudhuri, chief economist at Piramal Group, said it is unlikely the RBI would choose to disrupt festive consumption momentum, as historically the central bank has rarely opted for policy rate hikes during the October-December period. One of the reasons for the relatively rosier picture is a sweeping overhaul of India's tax system last year, which reduced prices on everything from cars and appliances to everyday household goods, freeing up disposable income.
Despite the positive outlook, dark clouds remain on the horizon. According to The Hindu BusinessLine and NDTV Profit, war-related uncertainty hasn't yet receded, with renewed Middle East tensions pushing oil prices back toward $90 a barrel, a concern for India which imports almost 90 per cent of its crude. A weaker rupee, among Asia's worst-performing currencies, could add to pressures by making imports more expensive. There's more risk coming from overseas, with the US Federal Reserve debating whether to lift borrowing costs at its September 15-16 meeting, while the Bank of Japan is also considering whether to proceed with additional hikes to contain inflation. Most other Asian counterparts have already tightened policy, with India proving an outlier. "The future course of monetary policy in developed markets, particularly by the Federal Reserve and Bank of Japan, could constrain the RBI's policy flexibility," said Garima Kapoor, economist at Elara Global Research, predicting an unchanged monetary stance through December.
