India’s economic trajectory in FY25 is under pressure with Q2 of FY25 recording a growth rate of 5.4 per cent, slowest in the last 7 quarters. Axis Bank predicts the growth estimates for FY25 and FY26 to be 6.6 per cent and 7 per cent respectively.
Addressing the question on rate cut, Neelkanth Mishra, Chief Economist at Axis Bank stated that the Monetary Policy Committee (MPC) is unlikely to cut rates for the next 13-14 months due to persistent inflationary pressures.
Despite these headwinds, Mishra predicts a rebound to 7 per cent GDP growth in FY26, driven by local policies and investment-led growth.
Mishra sees no rate cuts for the next 14 Months
The Axis Bank Chief Economist stated that there is limited scope for rate cuts over the next 14 months, with inflation expected to average 4.5 per cent in FY26. “Food prices are at cyclical highs, and the supply response has been inadequate despite income-transfer-driven demand,” Mishra explained.
Discussing the approach of policymakers, Mishra emphasised the importance of forward-looking indicators.
When you put yourself in the shoes of the policymaker, you have to keep in mind that you don’t respond to concurrent indicators. Where is inflation going to be? Just because of the October-December quarter of 2025, the high base of this year causes the headline inflation to correct to 4%, it may or may not. It doesn’t mean this is an opportunity. We are trying to look for sustained trends of inflation. The objective of monetary policy is to smooth out medium-term growth, not to maximize near-term growth.Neelkanth Mishra, Chief Economist, Axis Bank
Mishra further added, “Unless you see signs of inflation sustainably coming down, I don’t think any central bank should cut the repo rate or start a cycle of rate cuts. All you can cut is 25 or 50 basis points, how much benefit is that going to give?”Headline inflation, though projected to moderate, is unlikely to sustainably reach the Monetary Policy Committee’s 4 per cent target. Persistent food price volatility and robust demand continue to pose challenges.
Fiscal Tightening slowed the economy
Only 29 per cent of the FY25 budgeted fiscal deficit was utilized in the first half, compared to a historical median of 62 per cent. This created a fiscal drag equivalent to 1.6 per cent of GDP.
“There was 33% of the full-year fiscal deficit which should have been incurred but wasn’t,” Mishra remarked.
When something like this happens, where there is very unintended and significant fiscal tightening, it’s a massive headwind to growth. If one-third of the fiscal deficit is missed in six months, that’s equivalent to 1.6% of GDP of fiscal tightening squeezed into six months. If annualised, it’s well above 3%.stated Mishra
As this fiscal drag reverses, Mishra expects the economy to rebound. “Since October 2024, this reversal process is well underway. While the government may miss some capex targets, broadly, they are committed to the fiscal deficit. The second half will see a big surge in spending.”Credit Growth Slump and Liquidity Challenges
Higher borrowing costs and tighter liquidity conditions have reduced credit growth sharply across sectors. However, credit growth is projected to recover to 16-17 per cent by March 2025.
“Credit growth slowed sharply from March and further in November,” Mishra added.
Some of this was intended, like addressing excesses in microfinance and unsecured personal loans. However, credit growth slowed much more than expected. While personal loans and credit cards contributed to a 2 per cent decline, the overall slowdown exceeded 4.5 per cent.Neelkanth Mishra
Mishra attributed this primarily to liquidity constraints. “For 31 months, credit growth was weaker because the central bank wasn’t injecting money. M3, or broad money growth, was still 11%, but from March-April, when banks were warned about loan-deposit ratios, deposit formation slowed, causing a negative credit impulse.”
Despite this, the economy remained resilient. “If you see a 4-5% credit slowdown, it’s odd that the economy isn’t slowing,” Mishra said.
Corrective measures have started to address these challenges. “The RBI moved the overnight liquidity surplus starting in July, and last week they cut the CRR, an important part of system configuration. This isn’t just about the additional liquidity of Rs 1.6 trillion that banks get. This high-powered money can add Rs 5 to 6 trillion to liquidity over the next few quarters,” Mishra explained.
