India’s GDP to grow at 7.4 %: ICICI Bank

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ICICI Bank expect India’s GDP to grow at 7.4 % in next fiscal year, and Rupee to strengthen to 69 by March 2019


• Expect Indian growth to recover marginally in FY2020 to ~7.4% YoY from ~7.2% YoY in FY2019.
• Expect CPI to continue to average ~4% for H1 FY2020 but then pick up sharply in H2 FY2020.
• Expect the Rupee to strengthen towards 69 by March 2019


Global growth is likely to see broad based slowdown across regions although it is unlikely to be anywhere close to recessionary territory as markets are currently fearing. The US had seen growth exceptionalism in 2018 whereas other regions like Eurozone and China saw tepid performance. We expect the US to slow down next year from the 3% growth handle to around 2.3% (Federal Reserve expectations), which is still higher than long period average. Other G4 regions should recover marginally and Chinese policymakers are expected to engineer a soft landing. Calibrated policy tightening will continue in H1 but may lose pace in H2.

Views on asset classes:
Dollar Index: Has seen substantial strength in 2018 on growth and rate differentials. 2019 should see its burgeoning twin deficits start to weigh on it, but the weakening will not be sharp. The calibrated withdrawal in stimulus in other regions should also narrow rate differentials and start to weigh on the dollar. However, it is unlikely to be a secular decline as the US growth momentum is still very strong compared to the rest of the G4. It is likely to happen in stages interspersed with bouts of strength on risk aversion, which typically strengthens the Dollar. Hence some parts of H1 2019 could still see some strength which will start losing ground once the non US growth picks up and the Federal Reserve decisively signals the end of the cycle.

Dollar rates: We expect Dollar rates to stay stable as the Federal Reserve adopts a more dovish stance and markets start aggressively paring down expectations of further hikes. We believe at least one hike is still possible in 2019 and the second would remain strictly data dependent. The US rates have also not gone up significantly as inflation pressures remain contained. Given benign expectations of inflation, upside possibilities for long yields are limited. Markets are also pricing in fears of over tightening by the Federal Reserve. The curve is likely to continue to flatten and could even see inversion in the 2 Year Yield 10 Year Yield segment. However, issuance pressures due to high fiscal deficit could exert some upside pressure.
The US money market rates are facing upward pressure as the Fed continues to contract its balance sheet. However, during the course of 2019, it is possible that this pace could also slow down if the Fed signals more comfort with higher excess reserves.

Emerging Market currencies: Performance of EM currencies against the Dollar will be mixed and less vulnerable economies, with stable political set up and current account surpluses would be preferred. The fall in oil prices would also benefit high yielding current account deficit countries such as India and Indonesia.

Chinese Yuan is likely to show a depreciation bias on deteriorating current account and ongoing trade wars with the US. However, policy measures should support growth and flows, and prevent sharper depreciation beyond 7 against the Dollar. Continued capital inflows should also provide some support.

Brent: Oil prices should get support after the OPEC and non OPEC countries output cut and with prospects of some demand slowdown probability of price spikes are lower. We expect Brent prices to average ~USD 65/bbl in 2019.

India macro and asset views:
Growth: We expect Indian growth to recover marginally in FY2020 to ~7.4% YoY from ~7.2% YoY in FY2019. Consumption demand will see some slowdown but support will be provided by some ongoing recovery in investment growth. Some pick up in credit growth once banking sector health improves further will also provide support.

Inflation: Has been remarkably benign so far coming in at the 2% handle primarily on very low food prices even though underlying price pressures (core inflation) remain high. We expect CPI to continue to average ~4% for H1 FY2020 but then pick up sharply in H2 FY2020. Risks from a possible reversal in food prices and fiscal slippages remain.

Monetary policy: Given the sustained period of continued low inflation we expect the Monetary Policy Committee to change the stance to “neutral” from “calibrated tightening” in February and the probability of a rate cut is also rising. However, the trajectory for H2 FY2020 should be kept in mind and we should remain cognizant of the fact that food price pressures or fiscal pressures could resurface at any time and hence we believe that the MPC should remain on a long pause.
Current account deficit: India’s current account deficit will see a positive turnaround in FY2020 due to lower oil prices. We expect a lower CAD of ~2.1% of GDP as compared to a lower than expected 2.5% of GDP in FY2019. We are also likely to see a small balance of payments surplus of ~USD 9-10 bn next fiscal as compared to a deficit of ~USD 18-20 bn this year.

Fiscal deficit: We expect the FD to breach by ~0.2-0.3% of GDP at the Centre level and state as well to have a consolidated deficit of ~6.4-6.5% of GDP. However, we do not expect extra deficit to be financed through market borrowings. Other means of financing and some expenditure shifting or reduction would be resorted to. Fears of sweeping nationwide farm loan waivers are growing but these are usually implemented on a staggered basis.

Rates: System liquidity is tight and RBI’s assurance of continued Open Market Operations which has been recently stepped up will be supportive. The change in policy rate stance along with low CPI and lower oil prices are all supportive of bonds. Substantial OMOs will ensure system liquidity deficit turns surplus by Q1 FY2020. We expect benchmark yields to trade up to 7.0-7.20% range in the medium term provided oil prices stay benign. Fiscal risks would keep markets cautious till interim budget.

Rupee: We expect the Rupee to strengthen towards 69 by March 2019. Over FY2020 we expect it to trade ~69-72 against the dollar. Capital flows would have to be watched especially on the Foreign Portfolio Investor as policy uncertainties and related volatility will continue even in 2019. However, much improved external funding metrics and a pullback in the dollar rally should be supportive. We expect the RBI to step in to stem in sharp appreciation pressures in the currency in the event of a strong improvement in risk sentiment.

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