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Motilal Oswal Report
India's real gross domestic product growth slowed unexpectedly and suddenly to 5.4% YoY in Q2 FY25 versus the RBI's projection of 6.7%. In our previous QEO, we projected a growth of 6.2% in 2Q (versus market consensus of ~7% then) and 5.7% in H2 FY25.
Considering Q2 data and October 2024 data, we slightly lower our H2 FY25 growth forecasts to 5.0-5.5% in H2 FY25, implying full-year growth at 5.8% (versus 6.1% expected earlier). We keep our real GDP growth forecasts for FY26/FY27 unchanged at 6.2-6.3%.
At the same time, we raise our FY25 headline retail inflation forecast to 5.1% YoY (from 4.5% earlier), as we expect a high inflation print in Q4 FY25 (unlike the RBI and the market consensus).
Although weak growth will push the RBI to cut rates in Feb-25, the combination of weak growth and high inflation in H2 FY25 will certainly make the task difficult for the RBI.
Lastly, we expect the Center's capital spending to be much lower than the budgeted Rs 11.1 trillion; however, higher revenue spending and weak nominal GDP growth will likely keep the deficit at 4.9% of GDP in FY25.
Moreover, with lower RBI dividends, and thus, lower receipts next year, a deficit of 4.5% of GDP will mean subdued growth in total spending by the Center, keeping overall economic growth subdued.
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