Mumbai: A surprise slowdown in Indian growth along with record-low inflation has thrown the Reserve Bank of India’s hawkish monetary policy bias into question, with some economists suggesting an interest rate cut may be back on the table.

While the government still sees India growing at 7.1% for 2017, a 6.1% expansion in gross domestic product (GDP) in the first quarter undershot economists’ expectations by a full percentage point and was the slowest in two years. The RBI meets on 6 and 7 June to decide on monetary policy.

“The weak GDP print for the Jan-March quarter combined with recent declines in India’s CPI inflation rate to just 2.99 percent in April opens the door for the RBI to ease policy rates further," Rajiv Biswas, Asia-Pacific chief economist for IHS Markit said in an email. “The recent easing of world oil prices is helping to keep India’s inflation dragon at bay, and with bank credit growth very weak, the RBI has a stronger case for further monetary policy easing."

The figures showed manufacturing and construction slowing in Asia’s third-largest economy while the impact of Prime Minister Narendra Modi’s shock ban on high-denomination notes in November continued to weigh. Analysts also speculated the country’s bad-loan crisis was beginning to impede growth.

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Still, many analysts don’t expect the central bank to cut rates in near term but will likely dial back its tighter policy rhetoric. The RBI’s monetary policy committee, having changed its stance to neutral from accommodative in February, will be reluctant to reverse course so soon, especially when the US Federal Reserve is likely to raise rates further.

“GDP numbers have surprised markets," Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset Management Co. “This may very well feed the current market hypothesis that RBI may tone down its hawkishness. Irrespective, we expect that bar for any action from RBI remains very high.’’

Inflation recedes

Recent headline inflation prints have consistently come under the central bank’s own expectations. The RBI aims to keep inflation near 4% in the medium term. In related economic data, India’s budget gap reached 100% of its target for the year.

“While we think that the RBI will acknowledge a down shift in the inflation trajectory and revise its forecasts lower, this might not be enough for the stance of monetary policy to change immediately. We also expect no change in the policy rates on June 7," said Indranil Pan, chief economist at IDFC Bank, Mumbai.

Analysts and the RBI still expect growth to pick up in the rest of the year. A normal monsoon is poised to boost rural incomes while increased government spending, and higher allowances for workers in the public sector may bolster activity and consumption in the $2 trillion economy.

“We also expect growth to remain supported due to expectations of firmer consumption and exports," Shashank Mendiratta, economist at Australia & New Zealand Banking Group Ltd, said in a note. The bank is maintaining its fiscal 2018 forecast for 7.5% growth, he said.

Soured loans

Looming over the economy is also the introduction of a national goods and services tax, scheduled for 1 July, which could cause short-term disruption to activity.

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According to Kaushik Das, chief India economist at Deutsche Bank in Mumbai, India’s growth and inflation dynamics are different from the last time the country was growing strongly at the start of the decade. Then, real GDP growth averaged about 9.5%, but CPI inflation was also running high at about 12%.

Those heady days saw significant leveraging in the corporate sector. But once growth dropped off, companies were saddled with huge debt which continues to cause stress on their balance sheets, not to mention the banking sector. That’s forcing many companies to put off investments and driving demand for loans from the private sector to a decade low. Meanwhile, the central bank has ramped up efforts to solve the bad-debt problem.

“It is imperative to get inflation and inflation expectations down, to achieve higher and sustainable growth and investments. From this perspective, there is no trade-off between growth and inflation in the long term," Das wrote in a note this week.

There are also niggling questions about the quality of growth and whether the economy is creating enough jobs.

To be sure, the economy needs to grow at more than 10% consistently to absorb a steady inflow of new workers. By 2050, about 1.1 billion Indians are expected to comprise the working-age population of 15 to 64, according to the United Nations. Bloomberg

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