Key factors such as adverse spillover from the anticipated (albeit somewhat delayed) global slowdown, dilution of pent-up demand (especially in services), and lagged impact of domestic monetary tightening, among others, are expected to moderate India’s second half (H2 FY24) GDP growth to 5.0-5.5 per cent, according to Acuite Ratings and Research.

India had a strong first half in FY24, with the growth print in Q1 (April-June) FY24 high at 7.8 per cent year-on-year (y-o-y) likely to be followed by a solid 6.8 per cent y-o-y in the second quarter, going by the Acuité Macroeconomic Performance index (AMEP) which is based on a wide range of high-frequency indicators.

The credit rating agency expects the latest RBI measures on uncollateralised retail lending to restrain leveraged urban demand.

Likelihood of some downside to Kharif crop yields post monsoon deficiency in 2023 and elevated crude oil prices above $90 per barrel (pb) over H2 FY24, can shave off 10-15 basis points from GDP growth, said Suman Chowdhury, Chief Economist and Head – Research, Acuite Ratings and Research.

Indications of weaker rural demand

The resilience in urban demand is clearly one of the primary drivers of the current momentum in the Indian economy albeit there may be some impact of the latest RBI circular which seeks to tighten the sharp growth in consumer lending, according to Acuite Ratings’ assessment.

The credit rating agency observed that there are indications of weaker rural demand in the second half of the fiscal due to the El Nino phenomenon and the estimated shortfall in the Kharif crop along with the risk to the Rabi crop. 

“The ICC World Cricket Cup Trophy has contributed to pushing up consumption demand in the months of October-November 2023 along with the regular festivities. Urban demand has reportedly been strong as reflected by a step up in passenger vehicle sales, online food deliveries, airline traffic, and hotel occupancies,” Chowdhury said.

Retail inflation

The agency said India’s CPI inflation moderated further in October 2023 to 4.87 per cent y-o-y from 5.02 per cent in September. However, the outlook on food inflation remains somewhat clouded amidst the expected downside to Kharif yields, especially pulses and oilseeds, as per the government’s first advance estimates and the risks to the Rabi crop due to uncertain weather conditions.

Crude prices have behaved erratically over the last few weeks, trading in a broad range of $77-97 pb. The extension of OPEC’s production cuts and resilience in the US economy offered support along with geopolitics. However, concerns over elevated inventories and Chinese demand have weighed on prices lately, Chowdhury said.

“Core inflation at 4.1 per cent y-o-y in October 2023 marks the lowest level in the post-pandemic phase, well below its LPA (long period average) of 5.2 per cent. We hold on to our FY24 average CPI inflation estimate of 5.6 per cent, considering the downside risks,” he opined.

MPC and rates

Acuite expects RBI to moderate core liquidity surplus from ₹2.9 lakh crore as of the end of Q2 FY24 towards ₹1.7 lakh crore by end Q4 FY24 to boost policy transmission.

“With India’s inclusion in JP Morgan’s EM Bond Index, there is a possibility of $20 billion passive inflows by March 2025. With domestic inflation projected to moderate and index inclusion becoming a reality, we expect 10Y Government Security yield to moderate towards seven per cent by March 2024. However, El Nino and geopolitical factors could potentially provide an upside risk,” it said.

Most of the major central banks in the world including the Fed and RBI are likely to be in a pause mode for the next six months to assess the growth-inflation dynamics closely before deciding on a pivot, per Chowdhury.

“This will help to normalise the capital flows to India, help the INR (Rupee) regain some strength, and moderate the bond market yields. Hopefully, that will set the right platform for a favourable funding environment in the next fiscal,” he said.

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