Liqian Ren, Ph.D. and director of modern alpha for WisdomTree, spoke with Pranjul Bhandari, HSBC managing director and chief India economist, as well as Aneeka Gupta, director of macroeconomic research for WisdomTree, on the most recent China of Tomorrow podcast from WisdomTree. Topics discussed include looking into the current state of India during the Russia-Ukraine war, possible inflation risks, and growth outlook.
Bhandari opens with discussing the current economic environment in India, which is experiencing elevated inflation of around 4%-6%, but says that it isn’t runaway inflation. Rising oil prices are set to affect every area of the macroeconomy, as oil is a key import for the country and could be a large contributor to decreasing GDP growth and increasing inflation.
“At this point, if India was to run a balance-of-deficit for a few quarters, I think it will actually be a blessing in disguise, for the simple reason that the RBI is really trying to drain out rupee liquidity from the market as a way to control inflation,” Bhandari says.
The Reserve Bank of India (RBI) is forecasting inflation to settle back down around 4% by the end of 2022 after being elevated over the last two years, reflecting its view that inflationary pressures for India remain mostly temporary from demand spikes and abating supply shocks. Bhandari anticipates tightening from the RBI beginning in the second half of the year with two rate increases of 0.25% this year.
Income Inequality, the Green Economy, and India's Investment Cycle
Discussion turns to the growing income inequality in India that the pandemic has made more significant, both at a firm level and an individual one.
“This is a big deal for India because 80% of India’s labor force is working in the informal sector, so if they see job losses, salary cuts, then their spending over time actually comes down,” Bhandari explains. “That can really dent demand in the economy and really hurt growth and even the fortunes of the large corporates at the top of the pyramid.”
There is enormous potential in the green economy in India and an increasing transition to renewables, but Bhandari believes that it will require an alignment at the bureaucratic level to really optimize, create frameworks, and streamline the green transition in India.
The investment cycle and growth of investment in India is reliant on four main factors, according to Bhandari: world growth, health of the balance sheets, policy uncertainty, and growth uncertainty. The latter two remain a big concern as changes continue to happen on the global stage that cause volatility, rising commodity prices, and a host of other effects that are holding back growth in India.
“Strong growth, risk appetite, good growth, hefty flows, all of that can have an impact on the financial conditions in India, and that over time can be supportive of investment,” Bhandari says.
Other topics covered include the strength of the rupee, domestic policies that can promote stability for India, data sources for gathering up-to-date economic data, and tips for considering investment into India.
WisdomTree carries a variety of funds with exposure to India, including the WisdomTree India Earnings Fund (EPI ), the WisdomTree Emerging Markets Quality Dividend Growth Fund (DGRE ), and the WisdomTree Emerging Markets ESG Fund (RESE ).
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