India's potential economic growth rate likely now at 7%, estimates Axis

By Anup Roy

India’s economy can grow at 7% without triggering an inflation spiral, Axis Bank Ltd. estimated.

The projection for the economy’s potential growth rate is based on fresh capital formation seen in real estate and private corporate sector, Neelkanth Mishra, chief economist of Axis Bank, said at a briefing on Monday in Mumbai. These segments of the economy slowed down during the 2012-2019 period. 

Last month, Fitch Ratings Ltd. raised its projection for India’s potential growth to 6.2% for 2019-2027 from 5.5% for the 2013-2022 period. S&P Global expects India to grow 6.7% per year from fiscal 2024 to fiscal 2031. 

An economy that’s growing faster than its potential would generally result in bottlenecks in supply, causing inflation to accelerate and putting pressure on the central bank to hike interest rates. 

The rising growth rate may not stoke inflation beyond where it is now, Mishra said. Core inflation, which strips out the volatile food and fuel prices, will continue to stay low at around 4% level, he said, without spelling out a duration. Food prices, however, will continue to remain volatile making it “very difficult for the RBI to cut rates,” said Mishra. 

However, the liquidity situation may improve, Mishra said, indirectly easing borrowing costs by about a quarter point.  

Last week, the Reserve Bank of India signaled interest rates will remain higher for longer as food inflation remains a concern, while revising its growth outlook to 7% for the year ending March.

Interest rate cuts in the US may not automatically prompt the RBI to lower borrowing costs as the central bank would be focused on domestic inflation, Mishra said.