- Goldman Sachs expects RBI to raise rates three more times by June, totaling 75 bps
- India's economic growth projected near 7% despite global challenges and rate hikes
- El Nino poses inflation and growth risks in 2027, especially for the rabi harvest
According to Goldman Sachs Chief India Economist Santanu SenGupta, the Reserve Bank of India (RBI) is anticipated to raise interest rates another three times by June, bringing the total increase to 75 basis points. However, SenGupta believes that India will continue to achieve approximately 7% economic growth.
SenGupta also expressed concern regarding El Nino as a potential obstacle for both economic growth and inflation in 2027. "We're anticipating approximately 75 basis points of additional tightening," SenGupta stated. "However, even with that, we believe that we'll be able to achieve approximately 7% economic growth, which is impressive considering that we're an oil importer operating within this type of global climate."
El Nino Presents a Threat for 2027 SenGupta believes that El Nino, which has yet to be fully accounted for by many financial market participants, represents a greater risk for 2027 than for 2023. SenGupta expects that the kharif (summer) harvest will be relatively unaffected by the El Nino event. As well, he believes that current inventory levels will help contain inflationary pressures for the immediate future. "In our opinion, El Nino represents a more back-end risk," SenGupta stated. Lower reservoir levels may harm the rabi (winter) harvest.
Additionally, with diminished stock levels by 2027, inflation could accelerate into 2027. "There is a downside to economic growth and an upside to inflation as a result of El Nino in 2027," SenGupta added.
Regardless of these risks, he still anticipates that economic growth will remain at approximately 7%. RBI Hikes in December, February, and April/June Goldman Sachs has projected that the RBI will implement rate hikes in December, February, and either April or June. "We would have one more [rate hike] in February, and after that perhaps the RBI can take a break to evaluate the situation, and then implement one final [rate hike] in April or in June," SenGupta commented.
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Goldman Sachs' own measure of hawkishness indicated that a rate hike was imminent in December. Many financial market participants have speculated that the RBI may implement a 50 basis point hike in December following the Indian currency's response to this week's policy announcement. "We are not entirely in that camp. We believe that this is a gradual tightening cycle," SenGupta stated. U.S. Interest Rates Restrict RBI Options SenGupta noted that high U.S. interest rates limit the options available to the RBI. "We have not seen U.S. 10-year interest rates at these levels for at least 20 years," SenGupta stated.
"INR rates and frankly all other EM rates will also need to catch up higher." EM refers to emerging markets. Crude Oil Represents the Greatest Risk Goldman Sachs' projections assume that crude oil prices will fluctuate between $85 and $95 per barrel. "If crude oil prices actually remain at $100 per barrel or above, it would represent a greater impediment to economic growth (due to the reduced absorption of fiscal capacity) and inflation," SenGupta stated. Economic Growth Surprises On the Upside SenGupta noted that despite multiple shocks (COVID-19 pandemic; Russia-Ukraine conflict; Middle East crisis), the Indian economy has exhibited surprising resilience. "The economy has been surprisingly resilient," SenGupta stated. Fiscal measures (such as cuts to GST; income tax; fuel excise duty) combined with a monetary easing cycle spanning approximately 1.5 years provided support for domestic demand.
However, that support is now waning. "There is little additional scope for stimulating the economy through either GST cuts or income tax cuts," SenGupta added. Private sector capital expenditures are growing in areas such as power generation; defense manufacturing; electric vehicle production; battery manufacturing; and data center development. "We are seeing the early stages of a private capital expenditure cycle recovery underway," SenGupta stated.
Earnings growth is expected to be in the mid-teen range this year, he added. Foreign Flows Remain Weak India continues to experience outflows from foreign investors who are pursuing AI-related opportunities in countries such as the U.S., China, South Korea, and Taiwan. "The world is pursuing AI," SenGupta stated. "The headwinds facing us are primarily external at this time."
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