India's upside risks

Perhaps the Reserve Bank of India was just following its former colonial master. For similar to the Bank of England (BOE) - it cut interest rates by 25 basis points to 0.25% in August 2016 to head off the potential negative fall-out from Brexit win of June of the same year - the Reserve Bank of India (RBI) did the same in August this year in order to cushion any adverse impact of the goods and services tax implemented on 1 July.

Both central banks appear to have gotten the upper hand.

The Indian central bank kept interest rates unchanged - repo rate at 6.0% and reverse repo rate at 5.75% - following its 4 October policy meeting. Financial markets widely expected the move and followed the RBI's 25 basis point reductions in the repo and reverse repo rates at its 2 August monetary policy committee (MPC) meeting.

Not surprisingly, the RBI admitted that the introduction of the GST in July have had a negative impact on economic activity particularly, in the manufacturing sector.

"This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates."

Moreover, "Consumer confidence and overall business assessment of the manufacturing and services sectors surveyed by the Reserve Bank weakened in Q2 of 2017-18." These prompted the RBI to lower its gross value added (GVA) 2017/18 growth projection to 6.7% from 7.3% predicted in August.

Indian GDP slowed to 5.7% in the year to the June quarter from 6.1% in the first quarter of this year. This is the slowest annual growth rate the March 2014 quarter (5.3%) and marks the sixth straight quarter of decelerating year-on-year growth.

Still, the Indian central bank noted some upside risks to its baseline outlook: "household consumption demand may get a boost from upward salary and allowances revisions by states" and "firms expect a significant improvement in business sentiment in Q3."

Indications provided by the latest Markit/Nikkei PMI surveys suggest that these may be on the way. The Nikkei India Composite PMI Output Index returned to expansion in September (51.1) from 49 in the previous month paced by a sharp improvement in the services sector (up to 50.7 from 47.5 in August and 45.9 in July) while manufacturing remained the expansion level despite slipping slightly to 51.2 in September from 51.3 in August.

As for "household demand" there are good portents as well with the surveys reporting "Indian manufacturers raised their staffing levels, and at the fastest pace since October 2012..."with services employment in fact increasing at the fastest rate in 75 months."

The Indian economy should also get support from external demand given the rupee's recent turnaround - it has depreciated by 2.7% versus the US dollar to 65.38 rupees from the 2017 high of 63.62 rupees it reached in early August.

Read more: RBIReserve Bank of IndiaBank of EnglandBrexitIndian GDPMarkit/Nikkei PMINikkei India Composite PMI Output Index
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