All eyes are now on the RBI’s Monetary Policy Committee or MPC meeting on December 4-6 after the Q2 GDP shocker at a seven-quarter low of 5.4 per cent. This coupled with the high inflation numbers for October has put a question mark on the possibility of any rate action in the near future.
What’s worrying economists further is the moderation in consumption on a sequential basis. Private consumption grew at a robust rate (6% YoY vs. 7.4% YoY prior), the sequential moderation acted as a drag considering its 65% weightage in GDP. Pickup in government consumption did not show any change either. Investment activity has been trending lower for the past 5 quarters. This is primarily on the back of the Govt trying to balance balance the fiscal situation through lower capex.
The slide in ‘Manufacturing’ activity with PMI falling to 56.5 in November added to the woes and the concerns around the state of the economy.
Inflation the big worry, can FY25 GDP targets be revised lower?
Can the lower GDP print make a case for a rate cut? Shreya Sodhani, Regional Economist, Barclays, explained that, “Despite growth print being significantly weaker than RBI’s expectations, we think primacy of inflation will prevail for now. Governor Das has repeatedly argued for primacy of price stability to support sustained high growth in the medium term. On inflation, high frequency indicators for food prices show softer momentum almost across the board for non-perishables in November, though vegetable prices show only limited softening. We think a majority of the MPC would want to see the bump in inflation through before easing.”
Economists at UBS, meanwhile, said that considering slowing domestic economic activity, the government is expected to refrain from pursuing a counter cyclical fiscal policy and rather support domestic demand. The firm also expects the recent surge in food prices to soften in upcoming months and the headline CPI inflation to get further relief from lower energy prices and input costs. Tanvee Gupta Jain, Chief India Economist, UBS, said, “We believe a high real policy rate and softening growth could create room for the RBI to cut the policy rate by 75bps over the coming months despite weaker FX. The slower than expected GDP growth in the September quarter will surely increase the pressure on the RBI to lower policy rate sooner than later considering bulk of the surge in headline inflation over the past two months (5.5%/ 6.2%YoY in Sept/ Oct) was largely led by cyclical factors and core inflation continues to remain largely contained.”
A report by JM Financial maintained that the unexpected weakness in GDP growth in Q2 may go unnoticed but the larger question is whether this sluggishness is temporary or whether it will sustain. While the latter will call for an appropriate policy response – both fiscal and monetary, the brokerage firm expects 20- 30bps moderation in its FY25 growth projections. “We continue to believe that the current inflation trajectory will not allow the RBI to ease, but it may act through the liquidity route to address growth concerns. We expect the status quo in December MPC meet; Feb 2025 would be the right time to evaluate policy easing. After the weak GDP print in Q2, we are now building in GDP growth of 6.8 per cent for FY25E (6.9 per cent prior) and 6.7 per cent for FY26E, “ it stated.
Will RBI consider changing its inflation forecast?
CPI inflation breaching the upper limit of RBI’s tolerance band in October (6.2 per cent YoY) is not a favourable backdrop for the MPC to commence the easing cycle.
Madan Sabnavis, Chief Economist, Bank of Baroda, said, “Given the rather uncertain global environment and the possible impact on inflation and the fact that currently inflation has been averaging close to 5.9 per cent in the last two months, a status quo on repo rate will be the logical outcome from the policy. There would be change in RBI projections for both inflation and GDP as inflation has been higher so far than the RBI forecast for Q3 and GDP growth has come much below expectations in Q2.”
However, IDFC First Bank’s Gaura Sengupta said that after the Q2FY25 GDP print, there is a higher chance of a rate cut cycle starting from December vs previous expectation of February. “Some measures will also be needed to address liquidity tightness with weighted average call rate near the MSF rate over the last few days. System liquidity has turned negative due to balance of payment outflows (FPI outflows and widening trade deficit). In response, RBI has net sold dollars’ worth $27 billion from October to November 22nd , resulting in a drain on rupee liquidity. Core liquidity surplus has reduced significantly to Rs 1.2 trillion as of November 22nd from peak levels of Rs 4.6 trillion, as of September 2024. This indicates that liquidity tightness could persist if BoP outflows continue,” she said.