The Indian economy will expand 7.4 per cent in 2018, but the growth will slow down to 7.3 per cent in the next year as domestic demand tapers on higher borrowing cost due to rising interest rates, Moody’s Investors Service said Thursday. In its report titled ‘Global Macro Outlook 2019-20’, Moody’s said the economy grew 7.9 per cent in the first half (January-June) of 2018, which reflects post demonetisation base effect.
Stating that borrowing costs have already increased on higher interest rates, Moody’s said it expects the Reserve Bank of India will continue to steadily raise the benchmark rate through 2019, which will further dampen domestic demand. “These factors will limit the pace of the Indian economy’s growth over the next few years, with real GDP growth of 7.3 per cent in 2019 and 2020, from around 7.4 per cent in 2018,” Moody’s said.
At its monetary policy review last month, the RBI maintained status quo on the benchmark interest rate — Repo rate — but changed the monetary policy stance to ‘calibrated tightening’ from ‘neutral’. Unveiling the bi-monthly monetary policy, the central bank had warned that volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation.
The repo rate — the rate at which the RBI lends to the system — will continue to be at 6.50 per cent. Going forward, the central bank is expected to raise rates.
Moody’s said the greatest downside risk to India’s growth prospects stem from concerns about its financial sector. “The impact of higher global oil prices compounded by sharp rupee depreciation raises the cost of households’ consumption basket, and will weigh on households’ capacity for other expenditures. Borrowing costs have already risen because of tightening monetary policy,” it said.
In the short term while measures to stabilise the financial sector are put in place, credit growth is likely to slow, Moody’s said. “Downside risks from a prolonged liquidity squeeze for non-bank financial institutions, which could lead to a sharper slowdown in their credit provision, remain,” it added. The liquidity squeeze for the NBFCs started after Infrastructure Leasing & Financial Services defaulted on a series of its debt obligations. As much as Rs 2.5 lakh crore worth of redemption of NBFC debt papers is lined up. Timely repayment of these obligations is being watched keenly by the financial markets as this could be one of the key factors for stability.
Moody’s said global economic growth will slow in 2019 and 2020 to a little under 2.9 per cent from an estimated 3.3 per cent in 2018 and 2017. The US-based agency expects trade and geopolitical frictions between the US and China to persist for some time. “This will weigh on the global trade growth and will reshape trade flows and supply chains,” Moody’s added.
India’s annual economic growth surged to a more than two-year high of 8.2 percent in the three months through June, powered by a sharp jump in growth in manufacturing, agriculture, construction sectors and a low base year growth of 5.6 per cent recorded in April-June 2017, according to latest data available with the Central Statistics Office (CSO). —With PTI
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