India economic growth may beat RBI forecast: Deputy governor

RBI Deputy Governor Poonam Gupta said India’s economic growth could beat the central bank’s 6.7% forecast, with growth nearing 7%. Stronger-than-expected indicators have improved the outlook, while markets are raising bets on a rate hike later this year.

India’s economy may outperform the central bank’s forecasts this financial year, according to Deputy Governor Poonam Gupta, as growth closer to 7% leaves policymakers watching for the need to raise borrowing costs if it further fans inflation.

In a speech on Thursday, Gupta painted an upbeat picture of India’s economy, based on stronger-than-expected high-frequency indicators. She added that a 7.5% pace “is a given” for India over the long-term, and that “we should aspire to do better than that.”

Gupta’s comments add to increasingly optimistic assessments of India’s outlook, suggesting the country is set to remain the world’s fastest-growing major economy. Expectations of strong economic growth also shows why Gupta has recently turned relatively hawkish. Minutes of the RBI’s August policy meeting released this week showed Gupta raising the possibility of a rate hike later this year.

India’s one-year overnight index swaps rate has jumped 11 basis points since the minutes — the most since May — indicating traders now expect a hike sooner than previously anticipated.

The OIS curve now implies a probability of three-to-four increases, with a 45-50% chance of the first move in October and a hike in December fully priced in, according to Abhishek Upadhyay, economist at ICICI Securities Primary Dealership. At the start of this week, market pricing reflected around two-three rate rises spread over the rest of the financial year that ends March, he said.

India’s gross domestic product data for the April-June quarter are due later this month, with economists’ predictions generally ranging between 6.9% to 8%.

The brisk pace points to the economy’s resilience despite shocks, such as a deficient monsoon and elevated energy costs. Last week, Prime Minister Narendra Modi reiterated his ambition to make India a developed nation by 2047. Such a feat may require a sustained 8% plus growth rate for at least two decades, economists say.

“We can definitely say the economy is far more resilient and better than what we were expecting three months back,” said Vivek Kumar, economist with QuantEco Research. He pointed to healthy corporate earnings, rising exports and bank credit, record high vehicle sales and index of industrial production growth reaching two-year highs.

Kumar is among economists who are predicting the RBI will deliver its first hike in almost four years in December. India has so far stood apart from many regional peers by leaving policy unchanged since the conflict in the Middle East began, even as central banks from Japan to Australia and Indonesia tightened monetary settings.

A flash survey by HSBC Holdings Plc. out earlier in the day, however, painted a mixed picture.

The figures showed that services purchasing managers’ index advanced to 54.5 in August from 53.3 last month, while the manufacturing purchasing managers’ index fell to 52.9 from 53.5. That left the composite index at 54.6, up from a more than a four-year low of 54.3 in July.

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