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India has `short-lived disruption’

Despite turmoil resulting from India's November demonetisation of high-value bank notes, the economy is expected to rebound this year, according to Schroders.

The outlook is far from bleak for the country as investors reveal they expect any slowdown to be limited, proven by the Jupiter India Fund’s ability to hold its place as the third most traded fund at The Share Centre in January.

If anything, the demonetisation, an attempt to weed out so called ‘black money’ and end the nation’s casual financial culture, signals reform that investors may be able to spot opportunities in according to Andy Parsons, head of investments at UK-based The Share Centre.

While the cautious decision made by Reserve Bank of India (RBI) to hold the Repo rate 6.25% on Wednesday did catch markets unaware, it also doesn’t seem to have deterred investors from making positive assumptions about the economic outlook.

Schroders’ emerging market economist Craig Botham said India’s policy seemed to be “on hold” until the bank works out the exact impact of demonetisation, but he expected the rate to be cut by the second half of this year. “We would not rule out further rate cuts this year. At a minimum, cuts will likely have to wait until the second half of the year, when the bank’s most immediate inflation concerns will have hopefully been assuaged.

“However, we think it is more probable that growth will recover after what will prove to be a short- lived disruption. Much more cash returned to the banking system than was expected, so long-term negative wealth effects will be limited, and banks may utilise the higher liquidity to boost lending. As this growth should also add inflationary pressure, the compulsion for the central bank to cut further should be correspondingly diminished,” Botham said.

Growth for 2016-17 is currently predicted to come in at 6.9% and looks set to recover sharply in 2017-18 the RBI has said in expectation that consumer demand bounces back from demonetisation, economic activity in retail, hotels, restaurants and transportation is restored and an ease in bank funding as a result of demonetisation leads to an eventual fall in interest rates.


Part of the Mark Allen Group.