India: stronger economic growth expected, rupee continues to depreciate

India exchange rateAfter two years of below 5% growth (4.4% in 2013 and 4.7% in 2012), the Indian economy is expected to grow more strongly for the remainder of 2014, with the International Monetary Fund (IMF) forecasting a full-year GDP growth rate of 5.4%. India’s economy expanded by 4.6% in the first quarter of 2014, according to the Ministry of Statistics and Programme Implementation.

High inflation is one of India’s major problems, standing at 8.28% in May 2014. Inflation is expected to slow slightly to 8% this year, after average annual inflation of 10.3% from 2008 to 2013, according to the IMF.

In June 2014, the Reserve Bank of India (RBI) kept its key interest rate unchanged at 8%. The RBI is expected to keep the key rate on hold at the third consecutive meeting in August 2014, according to HSBC.

The Indian rupee (INR) continues to slide, following two years of sharp depreciation. In July 31, 2014, the rupee depreciated to a three-month low of INR60.55 against the U.S. dollar, on capital outflows after the US Fed trimmed its monthly bond buying programme by another US$10 billion by end-July 2014. Moreover, high demand for the U.S. dollar from importers and the weakness in local equities also pulled the Indian rupee down against the U.S. dollar.

In defending the country’s currency, the RBI spent around US$ 17.23 billion worth of foreign exchange reserves during 2013, leaving the reserves at around US$274.81 billion. Planning Commission Deputy Chairperson Montek Singh Ahluwalia assures public that India has adequate foreign exchange reserves.
Modi brings hope
India gdp inflationRight after Narendra Modi’s election victory, there was widespread optimism about India’s economy and employment outlook. Modi has pledged to reduce inflation and eradicate corruption. The new PM also vowed to step up investment and clear regulatory hurdles for businesses.

Modi also pledged to reduce India’s fiscal deficit to 4.1% of GDP this year, from 4.5% in 2013 and 4.9% in 2012.

"After two consecutive years of sub-5% growth, the change in government is significant given the [Bharatiya Janata Party] BJP's economic emphasis, stability in composition and decisive governing structure," said Rohini Malkani of Citigroup India.