India: A pre-election stimulus

2 min
Mahamoud Islam
Mahamoud Islam Senior Economist for Asia

The Reserve Bank of India unexpectedly cut its policy rate by -25bp to 6.25% on 7 February as inflation (+2% y/y in January) remained at the lower bound of the Central Bank’s 4% ± 2pp target range and economic growth shows signs of weaknesses. Industrial production growth slowed in November-December (+1.3% y/y on average) after a growth rate generally above +4% y/y in the first ten months of 2018. USD-denominated exports rose by a modest +0.3% y/y in December. The rate cut came after the government announced a range of expansionary measures including handouts for farmers and tax cuts for the lower middle class. We expect economic growth to remain firm in the near term and to reach +7.4% in FY2018-19 (after +6.7% in FY2017-18). In the longer term, risks to the outlook are rising though, because (i) deteriorating public finances could hamper investors’ confidence and (ii) trade-related risks are increasing with signs of growth moderation in China and advanced economies.