India's gross domestic product (GDP) in FY16 is expected to grow by 7.7 per cent (FY15: 7.4 per cent) driven by a further pick-up in private consumption demand, India Ratings and Research (Ind-Ra) said.
Consumption demand is expected to expand 8.1 per cent in FY16 (FY15: 7.1 per cent and FY14: 6.2 per cent).
A significant moderation in inflation and inflationary expectations is likely to boost consumer sentiments, albeit gradually, the credit rating agency said.
The share of private consumption demand in GDP is around 60 per cent. Even investment and government expenditure would provide adequate support to consumption-led GDP growth.
The agency observed that there are conflicting views with respect to the monsoon in 2015 as the Indian Meteorological Department is predicting less-than-normal monsoon and private forecaster Skymet is expecting a normal monsoon in 2015.
Ind-Ra expects agricultural growth to come in at 2.1 per cent in FY16. Although much would depend on the spatial/geographical distribution of rains during the monsoon season, agricultural growth could be lower in the case of a sub-normal monsoon.
A sustained government focus on ‘Make in India’ and ‘ease of doing business’ and the successful auction of coal mines could push industrial growth to 6.5 per cent in FY16 (FY15: 5.9 per cent).
Indi-Ra expects both the wholesale price index (WPI) and consumer price index (CPI)-based inflation to moderate to 2.4 per cent and 5.6 per cent respectively, in FY16.
Retail and WPI inflation declined to 5.2 per cent and negative 2.3 per cent in March 2015, respectively.
Moderation in inflation/ inflationary expectations prompted the Reserve Bank of India to cut the repo rate by 25 basis points each on January 15, 2015, and March 4, 2015.
Ind-Ra expects RBI to cut the repo rate by another 50bp by FYE16.
Although the unseasonal rains in March 2015 and less-than-normal monsoon in 2015 can up the risk of food inflation, Ind-Ra believes soft global commodity/crude prices, low growth in the minimum support price of food grains in FY16, low pricing power of the manufacturing sector, and effective Government intervention in the food market would keep inflation within the glide path of RBI.
Ind-Ra thus expects the average 10-year G-sec yield to trade in the range of 7.2-7.3 per cent by FYE16.
India, a net commodity importer, benefitted considerably from the fall in global commodity prices especially crude in FY15.
Even in FY16, the country is likely to reap this benefit, in view of soft crude prices. As a result, current account deficit for FY16 could come in at $22.5billion (1.0 per cent of the GDP), down from $23.1 billion in FY15 (1.1 per cent of GDP).
With capital inflows remaining strong, the agency expects a net addition of $74.2 billion to India’s forex reserves in FY16, putting pressure on the rupee to appreciate. However, Ind-Ra expects RBI to intervene and manage it in the band of 61/$-64/$, leading to the rupee settling around an average 63/$ in FY16.
Ind-Ra believes that the fiscal deficit target of 3.9 per cent for FY16 is achievable because the projection of Government’s earning and expenditure for the year is moderate.