CareEdge expects MPC to cut rates in second half of FY25

The Reserve Bank of India’s (RBI’s) MPC (monetary policy committee) is expected to consider reducing interest rates in the latter part of FY25, according to CareEdge. By then, the RBI is likely to have a clearer understanding of the challenges posed by food inflation and the policy direction of the US Federal Reserve. The RBI will persist in handling liquidity to bolster money market conditions. The RBI governor may unveil measures to absorb the influx of dollars resulting from India's inclusion in global bond indices. Measures like OMO sales or Market Stabilisation Scheme (MSS) may be undertaken in the second half of the fiscal year to sterilise the inflows.

Given that the RBI governor has been highlighting the aim of getting inflation to 4% on a durable basis, the policy rates are likely to be kept on hold in the upcoming policy meeting, with no change in stance.

In March, there was a decrease in net direct investment inflows, while portfolio inflows reduced in April and May.

The Ministry of Statistics and Programme Implementation (MOSPI) estimates GDP growth at 8.2%, driven by strong investment demand. Gross Fixed Capital Formation (GFCF) surged by 9% in FY24. The manufacturing sector rebounded with a 9.9% growth in FY24 after a 2.2% contraction the previous year. The services sector, which is the largest contributor to India's gross value added (GVA), maintained its strong performance with a 7.6% growth rate, led by financial services, real estate, professional services, and public administration.

High-frequency indicators such as GST collections, E-way bills, credit growth, and passenger vehicle (PV) sales underscore the economic momentum. The labour market showed improvement, with the all-India unemployment rate averaging 7.5% in Q4 FY24, down from 9% in Q3 FY24, according to the data by Centre for Monitoring Indian Economy (CMIE). Both rural and urban areas have seen improvements, though challenges persist, especially for the economically disadvantaged.

Despite the overall GDP growth, private consumption has slowed, raising concerns. The growth rate of private consumption dropped from 6.8% in FY23 to 4% in FY24, the slowest pace in two decades excluding the pandemic year of FY21. However, recovering rural demand and a promising monsoon season could boost overall consumption, moderate food inflation, and support farm income.

Headline inflation has eased, averaging 4.9% in the first four months of CY24, down from 5.7% in CY23, thanks to lower core inflation, which has remained below 4% for five consecutive months. Nonetheless, food and beverage inflation remains high at 7.7% in the first four months of CY24 due to double digit inflation in vegetables and pulses.

Persistent inflation in non-perishable food items like pulses and cereals raises concerns about broader price pressures. Global commodity prices, particularly industrial metals, have risen by about 20% over the past three months, adding to inflationary risks. Ongoing geopolitical tensions further pose external risks, potentially disrupting supply chains. However, government measures and recent cuts in LPG and fuel prices are expected to help mitigate price pressures.

While goods export growth stayed modest, increasing by 4% in the initial four months of CY24, services exports saw a more robust growth of 7.3%. This positive trajectory in India's services exports is driven by the increasing global demand for digitally delivered services.