RBI MPC has cut its projection for inflation for FY24 from 5.2% to 5.1%. It includes a forecast of 4.6% for the first quarter, 5.2% for the second quarter, 5.4% for the third quarter, and 5.2% for the fourth quarter.
While the tamed inflation forecast may indicate a longer pause, RBI Governor Shaktikanta Das said that “Our goal is to achieve the inflation target of 4%, and keeping inflation within the comfort band of 2-6% is not enough.” The chances of inflation falling below 4% may not happen in the near term, however, the prediction of a favourable monsoon and stronger GDP growth bodes well for the pause scenario.
Monsoon, GDP growth, and other tailwinds
The Indian Meteorological Department recently predicted a “normal” monsoon for this year at the long period average (LPA) of 96% despite the higher probability of El Nino, a climate condition pattern that describes the unusual warming of surface waters in the eastern tropical Pacific Ocean. However, IMD revealed that most parts of India will witness deficient rainfall in June, except for some areas in peninsular regions.
India’s GDP (at constant 2011-12 prices) grew at a faster rate of 6.1% YoY (higher than estimates) in Q4FY23 compared with 4.5% YoY in the previous quarter. Given this pace, the annual growth came in at 7.2% YoY driven mainly by improvements in agriculture, manufacturing, mining, and construction sectors.
RBI has projected a growth of 6.5% in real GDP for FY24. It was the same forecast the central bank made in the April meeting when it was revised upwards from 6.4%. Throughout the fiscal year, the growth is distributed as 8% for the first quarter, 6.5% for the second quarter, 6% for the third quarter, and 5.7% for the fourth quarter.
As per Shaktikanta Das, “Domestic demand conditions remain supportive of growth. Urban demand remains resilient, with indicators such as passenger vehicle sales, domestic air passenger traffic, and credit cards outstanding posting double-digit expansion on a year-on-year basis in April. Rural demand is also on a revival path – motorcycle and three-wheeler sales increased at a robust pace in April, while tractor sales remained subdued.”
Further, healthy economic indicators like strong growth in GST collections (up 12% YoY to INR 1.57 lakh crores in May, following a record-high GST collection of INR 1.87 lakh crores in April) and encouraging PMI reading (hit the 31-month high of 58.7 in May and remained above the 50-mark for 22 consecutive months) certainly indicates resilience in the domestic economy.
Lastly, the movement of the US Federal Reserve is something to look out for as it sets the sentiment of a rate hike across the globe. Last month, US Fed raised the key short-term interest rates by 25 bps to a range of 5-5.25%, pushing borrowing costs to their highest level since August 2007. However, market experts believe that the Fed is expected to leave interest rates alone in the upcoming meeting next week. As per CME FedWatch Tool, Fed futures are reflecting a ~76% probability of a pause and ~24% probability of a 25 bps hike in the Jun 14 meeting at the time of writing.
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