High interest rates, oil prices to eat into India’s growth: IMF
The International Monetary Fund (IMF) expects Indian economy to grow slower than what it had estimated just three months ago because of higher crude oil prices and speedier interest rate hikes.
In an update to its World Economic Outlook (WEO), IMF trimmed India’s growth projection for 2018-19 by 10 basis points to 7.3%, citing negative effects of higher crude oil prices on domestic demand and faster-than-anticipated monetary policy tightening due to higher-than expected inflation. For 2019-20, IMF cut its projection by a sharper 30 basis points to 7.5%.
Why is this important
- As per the Economic Survey 2017-18, every $10 per barrel increase in the price of oil reduces economic growth by 0.2-0.3 percentage point, increases wholesale inflation by about 1.7 percentage points and widens current account deficit by about $9-10 billion.
- Over the past 1 year, crude oil prices have jumped by over 40%. Fears of a global supply crunch following outages in Libya and Venezuela have led to further 5% jump in crude oil prices since April.
- The Reserve Bank of India (RBI) on 6 June raised the repo rate by 25 basis points to 6.25%—the first rate hike in more than four years—citing higher risks from rising inflation. With retail inflation quickening to 5% and wholesale price inflation at 5.77% in June, we do not rule out a rate hike next month in its policy review on 1 August.
- Besides, the escalating trade war issues would further dampen the growth prospects.
Owing to the above mentioned factors, IMF has cut down its growth projects by 10 and 30 bps to 7.3% and 7.5%, respectively for FY19 and FY20. Investors should remain watchful for these macro factors as any easing could lead to a positive impact.