Although the US Federal Reserve’s decision regarding interest rates is yet to be announced, experts and economists believe that a rate cut announcement after its September 17-18 meeting is imminent. Now with the US Fed indicating the commencement of a rate cut cycle sooner than later, a report by InCred Equities stated that the hopes of the Reserve Bank of India (RBI) following suit improve, especially with India’s CPI inflation easing in the last few months.
Even as the high frequency economic indicators continue to weaken as seen from the subdued growth trend in loan credit, goods and services tax collections, automobile and home sales, InCred Equities report stated that sustained buoyancy in personal income-tax collections, healthy consumer sentiment and above-normal monsoon rains provide hopes of a turnaround in the festive season. “With the Consumer Price Index or CPI inflation easing to a comfortable level, if the RBI follows the global trend of cutting interest rates in 2HFY25F, the economic recovery can prolong,” it said.
The CPI inflation in July dropped to 3.54 per cent, marking a near five-year low as food prices eased and it inched up slightly to 3.65 per cent in August due to an increase in cereals prices, and a slightly lower base compared with the one for July.
Healthy consumer sentiment
At an all-India level, while seasonal rainfall surplus continues to cool off, touching 3 per cent from 5 per cent over the past one week, as many regions continued to experience the monsoon-break phase, northwest India saw improved rainfall in Aug 2024, reducing the region’s deficit from 13 per cent at the start of the month to a neutral zone. Meanwhile, east & northeast seasonal rainfall remained unchanged during the week. Furthermore, reservoir water storage levels are now 14 per cent above last year’s levels; southern and eastern regions lead while the northern region lags. As on 16 Aug 2024, total kharif crop sown area increased by about 2.1 per cent yoy to around 103.2m ha, topping the 100m ha level, where paddy rose by 5.6 per cent yoy to 36.91m ha.
Also, consumer sentiment in India marginally improved in Aug 2024, after easing from its July peak. According to InCred Equities, the improved spending sentiment in the current year provides hope. Also, the start of the festive season in early September 2024 in the southern and western regions will be eagerly watched as it will provide early cues on the next two months’ festive demand trend, it added.
GDP growth outlook
Per the estimates on India’s real GDP growth during FY25F by most multilateral agencies, professional forecasters and rating agencies converge at 7 per cent. Some of the estimates, like that of the RBI’s monetary policy committee were higher at 7.2 per cent whereas others like the World Bank were lower at 6.6 per cent.
The survey of economists by the RBI maintained its growth forecast for private consumption, as measured by private final consumption expenditure (PFCE), at 6 per cent. However, it reduced the forecast on investment spending, in the form of gross fixed capital formation (GFCF), to 8 per cent from 8.6 per cent in the earlier review. It appears that the upward revision in growth projection was based on expectation of a lower trade deficit, stated the InCred Equities report.
The MPC expects domestic growth to hold firm on the strength of investment demand, steady urban consumption and rising rural consumption.
Meanwhile, an area of concern is India’s merchandise trade deficit which widened to a nine-month high of $23.5 billion in July 2024. Trade deficit is now above $21 billion, for the third month in a row, due to slowing exports in July.
RBI’s stance on rates
According to MPC, the risks from volatile and elevated food prices remain high, which may adversely impact inflation expectations and result in a spillover to core inflation. There are also indications of core inflation bottoming out. Accordingly, the MPC decided to remain watchful on how these forces play out going ahead. The RBI MPC stays resolute in its goal to align headline inflation with 4 per cent target on a durable basis and considering these circumstances, the MPC had decided to keep the repo rate unchanged at 6.50 per cent in its August 2024 meeting.
The MPC has reiterated that it will continue with its disinflationary stance, until a durable alignment of the headline CPI inflation with the target is achieved.