India's economic growth in the second quarter disappointed with real GDP expanding by 7.0% y/y, down from the 7.5% pace recorded in the first three months of the year. The Indian economy is expected to advance by 7.3% and 7.6% in 2015 and 2016, respectively. Rising disposable incomes, the economic benefits from low international oil prices, and increasing infrastructure outlays will drive momentum through solid domestic demand.
Moreover, India is relatively insulated from the ongoing China concerns; less than 5% of its exports are purchased by China compared with a regional average of over 20%. The muted second quarter GDP outcome supports the view that the Reserve Bank of India (RBI) will likely provide additional monetary stimulus following its September 29th monetary policy meeting and lower the benchmark interest rate by 25 basis points to 7.0%. The previous rate cut took place in June. The decision will be justified by moderating inflationary pressures; in July, consu mer prices rose by 3.8% y/y, down from 5.5% the month before.
"Although our current forecast has price pressures picking up slightly toward the end of the year, we believe that headline inflation will meet the RBI's target of less than 6% y/y for January 2016", says Scotiabank.
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