Economists warn against RBI’s growth optimism, predicting FY25 growth of less than 7.2%
While the Reserve Bank of India’s (RBI) Monetary Policy Committee changed its monetary policy stance to neutral, it outlined a list of upside risks to its inflation projection, including unexpected weather events, geopolitical conflicts, volatile international crude oil prices and a recent crisis. increase in food and metal prices. The inflation projection was maintained at 4.5 percent for FY25.
On the other hand, the RBI expressed a more positive view on growth. RBI Governor Shaktikanta Das said India’s growth story remains intact as its fundamental drivers – consumption and investment demand – are gaining momentum.
The RBI kept its real gross domestic product (GDP) growth forecast unchanged at 7.2 percent for FY25, and raised its estimate for the second half of FY25 to 7.4 percent, despite lower figures in the first quarter and a downward revision of the second quarter. quarterly estimate from 7.2 percent to 7 percent. The RBI’s confidence in growth has surprised market participants, especially given that high-frequency indicators point to slowing economic activity.
“While economic growth has remained healthy, there are early indications of weakness,” said a CareEdge Ratings report, citing recent high-frequency indicators such as passenger car sales, road tolls, steel consumption and petroleum consumption. “Growth momentum has remained strong in the past, but there are indications of weakness in the high-frequency indicators,” said a note from Axis Mutual Fund.
Most economists estimate that GDP growth for FY25 will be lower than the RBI’s projection. “We see a growth of 6.5 per cent in FY25,” said Madhavi Arora, chief economist at Emkay Global Financial Services. “We are looking at the wedge between Gross Domestic Product and Gross Value Added and looking at some sort of collapse and a relatively slower consumption story compared to what the RBI is taking, and also relatively modest growth in manufacturing,” she added to.
The CareEdge report estimated GDP growth for FY25 at 7 percent. Dharmakirti Joshi, chief economist at CRISIL, said: “We estimate growth at 6.8 per cent for FY25, moderated slightly due to the impact of interest rates and reduced fiscal stimulus.”
The Indian economy grew at an annualized rate of 6.7 percent in the first quarter of FY25, below the RBI’s projection of 7.1 percent.
Last year’s 8.2 per cent growth had many one-off factors that had helped FY24 GDP, such as steep contraction subsidy payments, which boosted GDP, said Gaura Sengupta, economist at IDFC First Bank. “Then the GDP deflator slowed down significantly. That ultimately caused real growth rates to rise. Input costs had fallen sharply. So corporate profits rose, even though sales growth had slowed. This year, all those one-off factors will not be there,” Sengupta said. “Our estimate is 6.5-7 percent. We don’t consider it weak. Last year there were just a lot of one-off events,” she added.
Das has emphasized that the strong growth momentum allows the RBI to focus on the final phase of disinflation, which is slow. It remains to be seen whether the slowing growth outlook will create room for a rate cut when the rate-setting panel reviews policy in December.
“We think growth is gradually moderating, as evidenced by recent high-frequency indicators such as VAT collections, car sales and still unrecovered government investments. This, combined with ongoing disinflation, suggests that the ‘supportive growth’ part of the MPC’s mandate will receive more attention as inflation approaches the target,” Barclays said in a note.
First publication: October 11, 2024 | 12:32 pm IST