India Q3 Economic Outlook- Growth Forecast At 5.4% For FY25; Could Trigger A Rate Cut: Motilal Oswal

Motilal Oswal Report

For the third consecutive quarter, India’s real gross domestic product posted better-than-expected growth of 7.6% YoY in Q2 FY24. Not only India but also the U.S. economy has proven to be much more resilient.

It is therefore no surprise that we have to revise our growth forecasts upwards yet again in this version of the Quarterly Economic Outlook. We upgrade India’s real GDP growth projection to 6.7% YoY for FY24 versus the anticipated 6.0% YoY in Sep-23 (and from 5.6% YoY in Jun-23).

For FY25, however, we leave the forecast unchanged at 5.4%, assuming a broad-based slowdown. Further, nominal GDP growth forecast is also revised upwards to 8.2% for FY24 and 10.1% for FY25 (from 7.8%/9.9% in FY24/FY25 earlier).

After higher-than-expected consumer price index inflation in Q2 FY24, it has moderated to ~5.0% in the past three months (Sep-Nov-23).

Accordingly, we keep our FY24 CPI inflation projection unchanged at 5.6% and revise it down to 5.0% from 5.3% earlier for FY25. Further, while the Reserve Bank of India expects CPI inflation to moderate to 4.0% by Q2 FY25, this will be due to the base effect and hence temporary.

Without a major downward revision in the RBI/market forecasts for India’s growth and/or a global slowdown, a rate cut by the RBI appears difficult in CY24.

As in the last two years, government receipts could exceed budget estimates again this year, by about Rs 1 trillion.

If so, it will allow the GoI to spend an additional amount of up to Rs 650 billion and still meet its deficit target of 5.9% of GDP. This target, we believe, would be achieved.

For FY25, however, achieving a fiscal deficit of 5.2% of GDP would imply a growth of less than 7.0% YoY in core fiscal spending, the lowest in 13 years.

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