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Published Date: 11 June 2018
As we approach the mid-point of 2018, the Indian economy and financial markets appear to be at cross-roads. The sustained and visible pick-up in growth is accompanied by domestic and broad emerging market headwinds to macroeconomic stability. The concerns emanate from rising inflationary pressures, widening fiscal and current account deficits, sharp rise in oil prices and depreciation in the INR. All these factors along with the overhang of local politics make us cautious heading into second-half of 2018.
It was no surprise to see first few months since the roll-out of the GST marked by changes to tax filing procedures and tax rates on various goods and services. With the system now in operation for nearly a year, it appears to be stabilizing. Having said that, it must be noted that several anti-evasion features of the system including e-way bill and invoice matching have not yet been fully introduced. They are expected to be implemented in phases over FY 2019 and should result in improved compliance.
The promulgation of the Insolvency & Bankruptcy Code (IBC) was a direct outcome of the rising non-performing assets in India’s banking sector. At the end of December 2017, the gross non-performing assets (NPAs) of all banks in India stood at INR 8,410bn. The quantum of the non-performing assets was putting stress on capital ratios of state-run banks and their ability to boost credit growth. The code intends to overcome the systemic delays and complexities in India’s judicial process.
In a surprise move, the Reserve Bank of India (RBI) raised the repo rate by 25 bps to 6.25%. The decision was unanimous with all six members of the committee voting for a hike. The RBI cited its mandate to keep inflation, as measured by CPI, at 4% on a durable basis as the main reason for its decision to hike.
The Q4 FY 2018 GDP and GVA data came in at 7.7% and 7.6% respectively. The improvement was led by a pick-up in manufacturing and agriculture. T
The Indian Meteorological Department (IMD) has reconfirmed its first forecast of a normal monsoon season. They maintained 2018 forecast for southwest monsoon at 97% of long term average.
With our Q2 2018 forecast of 66.0 having been breached, we have revised our INR forecasts slightly. We now expect the INR to end Q2 2018 at 66.5, Q4 2018 and Q1 2019 at 67.0.
Monetary Policy Review
Updates to our Treasury and FX views
Oil institutions to set tone for markets
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