 "RBI Governor Raghuram Rajan at the news conference after the bi-monthly monetary policy review in Mumbai. Photo: Reuters")
Indian economy, which has enjoyed a sweet spot in macro economic indicators in recent years, is expected to see increasing external and internal uncertainties, says a Deutsche Bank report.
According to the global financial services major, while the medium term outlook of the economy remains constructive, latest data releases are somewhat disappointing.
In recent years, the country had witnessed declining inflation, stable rupee, and improving fiscal and external deficits, while external risks have been high during this period, with weak export demand, concerns about Fed, China, EU, UK referendum and regional geopolitics.
"There clearly won't be any respite from external risks this year, but we reckon that the some domestic factors are about to turn noisy as well," the report noted.
Regarding monsoon, it said monsoon rains are 25% below normal as of mid-June. "If the water shortage situation persists, it could hamper growth, push up inflation, and exacerbate the fiscal position," it added.
Additional risk would be around Reserve Bank of India's (RBI) Governor Raghuram Rajan's second term renewal. "If Rajan's term is not renewed or the Governor himself decides not to continue, this could affect investor sentiments and lead to volatility in financial markets," the report noted.
According to the Deutsche Bank, rising inflationary pressure would put Reserve Bank in a difficult spot, as any justification for cutting rates to support growth would be negated by the need to hold rates to meet the central bank's 5% Consumer Price Index inflation target in early 2017.
In its policy review meet on June 7, RBI Governor had kept interest rates intact citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.
The global brokerage expects Wholesale Price Index inflation to rise to 3.5-4.0% by the end of this calendar year.
An additional risk is the potential inflationary impact of pay commission awards, furthermore, global oil prices have bottomed and risen close to $50/bbl currently, it added.
"Monetary policy headroom has clearly reduced post the May inflation data; while inflation trajectory may improve in the coming months due to some course correction in food prices, we see the balance of risks clearly tilted to the upside, which will not allow the central bank to cut the policy rate any further, in our view," the report noted.
"India is likely to have seen the worst as far as growth is concerned, but the pace of recovery will likely continue to be gradual and uneven, given drags from private investment and global risks," the report said.
