India’s economy can grow at 7% without triggering an inflation spiral, Axis Bank Ltd. estimated, as investment in the country increases.
The projection for the economy’s potential growth rate is based on higher capital investment in the real estate and private sector, Neelkanth Mishra, chief economist of Axis Bank, said at a briefing on Monday in Mumbai. These segments of the economy slowed down during the 2012-2019 period.
The potential growth rate is an estimate of the pace an economy can grow at without causing excess inflation. An economy that’s growing faster than its potential would generally result in bottlenecks in supply, causing inflation to accelerate and putting pressure on the central bank to hike interest rates.
Last month, Fitch Ratings Ltd. raised its projection for India’s potential growth to 6.2% for 2019-2027. Bloomberg Economics estimates the rate could climb to 8.5% by 2030, largely due to added capacity in manufacturing and renewable energy.
India’s Potential Growth to Climb Quickly to 8.5% in Early 2030s
Mishra said faster growth may not stoke inflation beyond where it is now. Core inflation, which strips out volatile food and fuel prices, will continue to stay low at around 4%, he said, without spelling out a duration. Food prices, however, will continue to remain volatile making it “very difficult for the RBI to cut rates,” said Mishra.
However, the liquidity situation may improve, Mishra said, indirectly easing borrowing costs by about a quarter point.
Last week, the Reserve Bank of India signaled interest rates will remain higher for longer as food inflation remains a concern, while revising its growth outlook to 7% for the year ending March.
Interest rate cuts in the US may not automatically prompt the RBI to lower borrowing costs as the central bank would be focused on domestic inflation, Mishra said.
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