With inflation cooling, RBI may slash interest rates by 50 bps this financial year
- Economists at Bank of Baroda in their macro outlook for FY24 see India’s
CPI inflationmoderating to 5.5% as opposed to 6.7% in FY23.
- India’s GDP is expected to grow between 6-6.5% in FY24.
Indian economyexpected to stay resilient; headwinds such as global slowdown and El Ninofactored in.
In a webinar titled ‘Indian Economy FY24 — A Prognosis’, economists at Bank of Baroda said that they do not expect any rate action in the first half of FY24, but believe that the Reserve Bank of India (RBI) may effect two rate cuts amounting to a 50 basis point cut in the second half of the financial year.
“Generally, we expect stance to change before rate action, and now RBI is working on withdrawal of accommodation. I would be looking at the stance changing to neutral before the rate cut,” said Madan Sabnavis, chief economist at Bank of Baroda on Friday.
The prediction comes on the back of the belief that India’s inflation reading will continue to moderate. The economists expect CPI, or the consumer price index, inflation to moderate to 5.5% as opposed to 6.7% seen in FY23.
“The upside risks to this are a favourable base and lower energy prices globally. If the El Nino threat persists, it may affect the summer crops,” said Aditi Gupta, an economist at Bank of Baroda.
India’s growth gears
BoB economists expect India’s GDP to grow anywhere between 6-6.5% in FY24 which is slightly higher than IMF’s predictions of 5.9%. However, a report by SBI Ecowrap expects the GDP growth at 7.1% – in line with NSSO’s predictions of 7% growth.
It is noteworthy that SBI Ecowrap says that India is likely to continue its showdown in pursuing a different pathway of zeroing in on drivers of growth, looking for a renewed surge in resilient manufacturing while supporting the services sector to embrace enhanced efficiency.
“Locally, domestic consumption and investment stand to benefit from stronger prospects for agricultural and allied activities, strengthening business and consumer confidence, and strong credit growth while supply responses and cost conditions are poised to improve as inflationary pressure is easing,” SBI said.
BoB believes that the Indian economy will continue to be resilient, but has also taken into account other factors like expected slowdown in the global economy.
Advertisement“Unlike China, India is primarily a domestic oriented economy but it needs rural demand, job creation and other factors to play out,” said Sabnavis adding that there is uncertainty around the agriculture sector, due to the El Nino phenomenon.
In their presentation, BoB economists noted that downside risks to agriculture are – a possible heatwave from El Nino impact,
India’s bank credit is expected to grow anywhere between 12-14% in FY24, matched by a healthy growth of 11-12% in deposits. They also expect FPI inflows to turn positive after being in the negative zone in FY23.
Quantitative tightening in the international markets will also present its set of challenges. While investors will be left with fewer funds to choose from, the risk of recession might make them look for safe haven investments. Economists believe that both will be deciding factors in how much foreign inflows (FDI as well FPI) India sees in the current financial year.
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