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Informist, Thursday, Nov. 21, 2024

 

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--Goldman Sachs pegs India GDP growth at 6.3% in FY26
--CONTEXT: Goldman Sachs comments at event detailing India 2025 outlook
--Goldman Sachs sees India headline inflation at 4.2% in 2025
--Goldman Sachs sees India food inflation at 4.6% in 2025
--Goldman Sachs sees India CAD at 1.3% of GDP for 2025
--Goldman Sachs sees India rupee stable after falling to 85.5-86.0/$1
--Goldman Sachs sees India rupee falling to 85.5-86.0/$1 in 3-6 mos
--Goldman Sachs sees only two India rate cuts totalling 50 bps
--Goldman Sachs sees 'shallow' India rate cut cycle, only two cuts likely

 

MUMBAI – Goldman Sachs sees India's GDP growth decelerating marginally to 6.3% in the next financial year beginning in April, from 6.4% in 2024-25 (Apr-Mar) due to continued fiscal consolidation and a slowdown in credit growth, it said in a report.

 

The investment bank's estimates of India's GDP for FY25 and FY26 are lower than the Reserve Bank of India's projections by 80 basis points each. India's GDP grew 8.2% in FY24 and 6.7% in Apr-Jun--the lowest in five quarters.

 

Although India's strong long-term structural growth story remains intact, Goldman Sachs sees the onset of a cyclical slowdown during Oct-Mar due to the withdrawal of monetary accommodation over the last two years and macro-prudential tightening of consumer loans. Growth in retail loans has declined over the past one year because of the RBI’s decision to increase risk weights for lending to certain categories. 

 

"The structural long-term growth story for India remains intact driven by favourable demographics and stable governance. It is also relatively more insulated against global shocks including tariffs from the new Trump administration as external balances remain resilient," Goldman Sachs said in its report titled 'India 2025 outlook: Standing firm in an uncertain world', which was released Thursday. 

 

General government fiscal policy will remain a drag on growth over the next two years, given the fiscal consolidation target of the central government, the report said, highlighting the government’s weakening emphasis on capital expenditure.

 

"Since the pandemic, the government has overshot their budgeted expenditure on subsidies in order to deal with food price shocks due to adverse weather-related events. Additionally, several states which have concluded or would be going into elections in CY24 have announced cash transfer schemes, targeting women with a household income of under INR 0.2-0.3mn," the report said.

 

The investment bank also sees the possibility of some re-allocation in expenditure towards rural transfers and welfare spending, given the reduced majority secured by the National Democratic Alliance in the general elections held earlier this year.

 

SOFTER INFLATION

 

Goldman Sachs sees headline inflation based on the Consumer Price Index falling to 4.2% in FY26 from 4.7% in FY25 as it expects food inflation to cool off.

 

"We forecast a continued decline in headline inflation towards the RBI's target of 4% in CY25 as we expect nearly 2.5pp lower food inflation next year - adequate rainfall and good sowing of the summer crop point toward a better broad-based crop harvest", the investment bank said in its report.

 

Goldman Sachs expects food inflation to fall to 4.6% in 2025 from 7.4% in 2024. Its view on core inflation, however, is not as sanguine, with a forecast of 4.1% for 2025. Core inflation is seen inching up from around 3% by the end of 2024 as the lagged impact of wholesale price-based non-food manufacturing inflation and food inflation passes through, the investment bank said.  

 

Even as Goldman Sachs sees CPI inflation aligning with the RBI's target of 4%, it expects the central bank to be cautious in cutting interest rates, given the uncertainties in global trade policies and their impact on financial markets.

 

Moreover, the policy easing cycle may be a shallow one, the investment bank said. "As we view this cyclical growth slowdown as a reversal to trend, so monetary policy doesn't need to go materially below nominal neutral rate, which we estimate at 6% for India," it said in its report.

 

Goldman Sachs sees repo rate cuts of 25 bps each in February and April. It also expects the RBI to keep banking system liquidity in surplus, to let the overnight borrowing rate to fall to the bottom of the liquidity adjustment corridor at 5.75%, in effect easing rates by an additional 25 bps.

 

EXTERNAL SECTOR

 

Goldman Sachs expects India’s current account deficit to remain contained at 1.3% of GDP in 2025 as services exports are likely to remain strong, while crude oil prices are seen at a moderate $70-85 per barrel, the report said.

 

With RBI's large foreign exchange reserves likely to cushion the rupee against external shocks, the domestic currency may depreciate modestly to 85.5-86.0 per dollar over the next 3-6 months because of a globally strengthening dollar, Goldman Sachs said in the report.

 

In face of global shocks, the rupee is the most insulated currency in the region as India's bond and currency markets remain an attractive destination for foreign portfolio investors, the country’s growth has low sensitivity to global growth, and rupee has a low beta to Chinese yuan. Goldman Sachs sees $10 bln inflows into India equity, bonds each in 2025.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Pratigya Vajpayee

Edited by Deepshikha Bhardwaj

 

 

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