Goldman Sachs expects the RBI MPC to keep the policy repo rate unchanged at the April 5 meeting at 6.50%, retain the monetary policy stance of ‘withdrawal of accommodation’, sound optimistic on growth, and continue to reiterate the commitment to the 4% headline inflation target. “
High frequency data in Q1 CY24 shows a rebound in consumption activity, but softer investment activity as the government front-loaded capex in 2023. We forecast headline inflation at 5.2% in Q1 CY24, driven by high food inflation, even as core inflation has declined below the RBI’s target of 4%. We expect the RBI to take comfort from declining core inflation, slightly soften its hawkish forward guidance, but remain cautious given upside risks to food inflation from weather shocks, and repricing of the Fed funds rate easing path,” the investment bank said in a note.
Banking system liquidity has eased with active interventions by the RBI, and government spending over the last month which has softened inter-bank rates, and short-term borrowing rates for bank and non-bank entities, it said, adding that “when the RBI eventually starts the easing cycle, we expect them to run liquidity surpluses and let the inter-bank rate trade below the repo rate – we forecast one 25bp cut each in Q3 and Q4 CY24.”
Stronger than expected growth
| India’s Q4 real GDP growth surprised materially to the upside driven by higher investment spending, while private consumption expenditure remained muted. |
“Given the stronger than expected print and upward revisions to the earlier series by the statistical office, we raised our CY24 growth forecast by 10bp to 6.6% yoy. High frequency activity data remains strong, with our proprietary indices tracking a rebound in consumption growth at 7.9% yoy in Q1 CY24 (vs. +3.5% yoy in Q4.CY23), but slower investment growth at 2.3% yoy (vs. +10.6% yoy in Q4 CY23) as the government has front-loaded capex,” it said.
Inflation outlook
The bank expects the headline CPI inflation to increase modestly to 5.2% yoy in March from 5.1% yoy in February on the back of an increase in vegetable prices (onion and potato) and pulses (legumes) prices. The combined effect of the increase in vegetable and pulses prices along with sticky cereals inflation is likely to keep food inflation elevated at 8.1% yoy. “On the other hand, we estimate core inflation (headline inflation excluding food and fuel inflation) to decline modestly by 10bp to 3.2% yoy driven by a) ower core goods and services inflation and b) a reduction in pump prices of fuel, combined with a reduction in VAT by the states,” it said.
It estimates food inflation to remain elevated above 7.5% in 1H CY24 on the back of high cereals and pulses (legumes) inflation on the back of an ongoing heatwave in the country. On core inflation, it expects core services inflation to bottom out in Q1 and increase towards 4.0% by mid-2024 driven by an up-turn in housing (rental) inflation, and expect core goods inflation to increase on the back of a rise in manufacturing input costs with higher copper prices by the end of 2024. Overall, we expect core inflation to bottom out in Q1 CY24 and increase towards 4.0% by mid-2024.
| Goldman estimates headline inflation to remain above 5% in 1H CY24 and average at 4.7% yoy in CY24 driven by higher food inflation. |
“All together, we estimate headline inflation to remain above 5% in 1H CY24 and average at 4.7% yoy in CY24 driven by higher food inflation, partially offset by lower core inflation,” it said.
