Reviving India's economy: 3 key developments to watch out for in 2015
All will be watching what Narendra Modi has up his sleeve to kickstart the investment cycle and revive the economy.
2015 is going to be a crucial year for the Indian economy. Indians will be watching what Narendra Modi has up his sleeve to kickstart the investment cycle and revive the economy. However, here are three important events that will drive the economy next year.
1) RBI interest rate cut: The much-debated and most-sought-after event is slated to happen in 2015. Ever since retail inflation started trending downwards, mostly due to last year's high base effect, the calls for rate cut have only got shriller. From industry heavyweights like Anand Mahindra to top ministers like Arun Jaitley, many have been clamouring for the RBI to cut its repo rate, the policy rate at which the central bank lends to banks. However, RBI governor Raghuram Rajan has stood the ground as he insisted on waiting until the base effect wanes and there are signs that the fall in inflation is sustained.
"The message I have been sending is that we don't want to flip-flop back and forth," he said in a recent interview with NDTV.
The central bank will closely watch the retail inflation for December and following months before taking a decision. The budget, which will reveal the real picture of the government's priorities and its fiscal health, will also be key. The truth, however, is that rate has only a small role to play in kickstarting investment cycle. Nonetheless, if every thing goes as expected, the central bank will start its easing cycle by March or April.
2) US interest rate increase: Another event that has been the subject of a global debate ever since then US Federal Reserve Ben Bernanke hinted in May 2013 that the central bank may start winding down its stimulus programme "in the next few meetings". The reason for the statement, which rattled global markets including India, was the expectation that the US economy is getting back on its feet after five years of slowdown.
In order to boost the economy, the Fed had was buying bonds by printing dollars and also kept its interest rates near zero level during the period. The Fed started tapering in January 2014 by reducing the bond buying by $10 billion to $75 billion per month.
After five months, in May, Fed Chair Janet Yellen who succeeded Bernanke for the first time hinted at a rate increase by early 2015. The estimates on when the rate increase will actually happen has varied ever since.
On 17 December 2014, after the last rate setting meeting, the Federal Open Market Committee said the central bank "would take a "patient" approach in deciding when to bump borrowing costs higher". However, it is widely expected that the US central bank will start the rate increases from June as there are signs of strong economic revival. A rate increase in the US will definitely impact India. Foreign portfolio investors are likely to pull out of Indian assets to park their funds in safer US assets. As of 30 December, FII investments in Indian debt and equities stood at $42.4 billion in 2014. A large-scale pullout will weaken the Indian rupee, though the RBI insists that the country is now better prepared for such an eventuality.
3) Budget: The next big trigger for the markets and the economy is going to the Union Budget for 2015-16. All eyes are on Finance Minister Arun Jaitley, who has started his pre-budget meetings with various stake holders in the economy. After the not-so-commendable budget of 2014-15, there is wide expectation that this will be a dream budget, which will have policy initiatives to create more jobs and kickstart the investment cycle.
However, the most keenly watched figure in the budget will the fiscal deficit and how the government achieves it. The government has a deficit target of 4.1 percent for this year and 3.6 percent for next year. There are apprehensions that in order to meet these ambitious targets, the finance minister may have to continue with the financial jugglery of his predecessor as the government has not yet witnessed an increase in revenue, tax or non-tax. However, the market may still be ready to disregard this if the government takes steps to bring about meaningful reforms. Over to Jaitley, who is likely to present his budget by February last.
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