We forecast that GDP in India will grow by 8.1% in FY05/06 and 8.5% in FY06/07 versus consensus forecasts of 7.5% and 7.3%, respectively. Our viewon India is more optimistic than the market’s in large part because we do not see the constraints on growth many in the market fear.
• We judge India’s current account deficit to be sustainable and not a constraint on growth. The most recent trade data suggest that the rapid deterioration in the trade deficit since H1 2004 is stabilizing. Portfolio flows only account for 35% of total capital flows and one of the main determinants is GDP growth. We expect the balance of payments to improve in FY06/07. We are revising our USD/INR forecast to 43-43.5 from 44.5 by end-2006.
• Our analysis suggests that the central bank (RBI) will be able to manage liquidity conditions over the next three to six months to prevent a credit crunch. This is despite credit growth of over 30% year on year compared to 18% yoy deposit growth. Fiscal and monetary policy tools on the part of the state governments and central bank are available to inject liquidity in the next three to six months.
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