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Informist, Wednesday, Dec. 18, 2024

NEW DELHI – India's GDP growth is likely to pick up in the next financial year starting April on the back of monetary easing and support from the government's capital spending, India Ratings and Research said Wednesday. The rating agency also expects inflation to come down to near the Reserve Bank of India's medium-term target of 4% in FY26, paving the way for lower interest rates next year.

The agency expects India's GDP growth to rise to 6.6% in FY26, 20 basis points higher than its growth forecast of 6.4% for the current financial year. India Ratings, however, said that its forecasts could be affected by any tariff war, and any capital outflow, if the dollar continues to strengthen.

"The Indian economy has experienced a cyclical growth slowdown in the past three quarters, which it expects to reverse from Oct-Dec," said Devendra Kumar Pant, chief economist, India Ratings and Research. "While the Apr-Jun GDP growth was impacted by the combination of a strong base effect and the general elections in May, the growth in Jul-Sept witnessed the extended impact of weak private sector capital expenditure," Pant said at a press conference in which the rating agency released it 'FY26 Macro Economy Outlook'.

GDP grew 6.7% in Apr-Jun but fell to a seven-quarter low of 5.4% in Jul-Sept, forcing economists and the central bank to lower their full-year growth projections. The RBI earlier this month lowered its FY25 GDP growth forecast to 6.6% from 7.2%. The Indian economy grew 8.2% in FY24.

India Ratings expects investment growth to be higher than consumption growth in FY26, supported by both government and private sectors. Private sector capital expenditure is still not broad-based and is concentrated in a few sectors such as roads, airports, renewable energy, Pant said.

"Private sector participation in capex is important for sustainable economic growth and may alleviate some pressure on the government deficit," he said, adding that "low interest rates are necessary but not the sufficient condition for investment demand...Instead of nominal interest rates, it is real interest rates which have an impact on investment decisions".

INFLATION, INTEREST RATES

India Ratings expects CPI inflation to average 4.9% in FY26 and then moderate to 4.3% the next year, assuming normal rainfall and stable commodity prices in 2025. It sees inflation averaging 5.5% in Oct-Dec, lower than the RBI's forecast of 5.7%, and 5.1% in Jan-Mar, which is higher than the central bank's projection of 4.5%.

Inflation is seen falling to 4% only in Oct-Dec 2025, Pant said. RBI, however, expects inflation to reach 4% in Jul-Sept 2025. Pant highlighted that inflation intensity has declined recently and the sum of weights of commodities in the CPI basket with monthly year-on-year inflation of over 4% declined to 41.6% in November from 79.0% in August 2022. "Between February 2024 and November 2024, the aggregate weight of commodities with more than 4% inflation was between 36.5% and 42.9%," Pant said. 

With inflation expected to move closer to RBI's 4% target, the Monetary Policy Committee is likely to lower the repo rate by 100-125 basis points going ahead from 6.50% at present, Pant said. The timing of the first interest rate in nearly five years is, however, difficult to pinpoint, he added. 

"The February rate cut is not given, not certain. It will depend on data," Pant said at the press conference. The timing of the first rate cut of the easing cycle would depend on how the arithmetic of the Union Budget for FY26, inflation trajectory and evolving domestic and global landscape gel with the RBI's flexible inflation targeting approach, Pant added. 

The rating agency expects the government to lower the fiscal deficit target to 4.8% of GDP this year from the budgeted 4.9% of GDP. Next year, the government is expected to adhere to its fiscal deficit target of 4.5% of GDP, assuming nominal GDP growth of 10.2%, Pant said.  

The external sector is likely to remain stable in FY26, with the current account deficit projected to rise slightly to 1.1% of GDP from the 1.0% of GDP estimated for the current year. "Despite the weakness in rupee in Oct-Nov due to portfolio outflows, the rupee is estimated to average 86.87 per dollar in FY26," Pant said, adding that the currency depreciation in FY26 is forecast to be 3.2%, against the 1.7% estimated for FY25.  End

Reported by Shubham Rana

Edited by Avishek Dutta

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