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Economists lower India’s CPI forecasts on falling food prices

LiveMint logoLiveMint 29-06-2017 Cynthia Li

The Indian economy will expand 7.3% in fiscal year 2018, 7.7% in fiscal year 2019 and 7.7% in fiscal year 2020, according to a survey conducted by Bloomberg News. Growth forecasts were lowered slightly for this year and next year when compared to last month’s survey.

Analysis

Economists lowered their CPI forecasts for the 2018 and 2019 fiscal years to 4% and 4.75%, respectively, from 4.5% and 5% in last month’s survey after inflation fell to a record low 2.18% in May. Food and beverage prices declined by 0.22% last month after increasing 1.21% in April. Economists now expect a repurchase rate cut by the end of the third quarter of this year after previously not expecting any change.

Bloomberg

Key takeaways

■ Chance of a recession happening over the next 12 months is zero percent, according to 10 respondents

■ Q2 2017 GDP forecast at +7.0% y/y versus prior survey +7.1%

■ Q3 2017 GDP forecast unchanged at +7.0% y/y versus prior survey

■ 2018 WPI forecast unchanged at +3.00% y/y versus prior survey

■ Reserve Bank of India repurchase rate seen at 6.00% by end-3Q17, current rate is 6.25%

Source comments

“Structural reforms are pushing up potential growth, but high real interest rates are preventing a full-fledged recovery,” said Abhishek Gupta, an economist at Bloomberg Intelligence in Mumbai, “This suggests the output gap will persist and inflation continue to surprise on the downside — prompting the central bank to cut rates at its next policy review in August.”

“Since mid-2016, CPI inflation has fallen sharply to a record low of 2.2% in May,” said Arjen van Dijkhuizen, a senior economist at ABN Amro Bank in Amsterdam, “That partly reflects a sharp drop in food price inflation. We have lowered our CPI forecasts for this year and next year to 4.0% and 4.5% respectively. With the real policy rate having surged to over 4% in May, the Reserve Bank of India has shifted its tone recently. We now expect the RBI to cut the key policy rate by 25-50 basis points in the remainder of this year.”

Bloomberg

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