According to economists at Bank of Baroda, India’s central bank RBI may reduce/cut its lending rate twice in the second half of this year (FY24) after raising interest rates by 250 basis points in the last financial year (FY23). As a result, the repo rate will fall to 6%, from 6.5% currently.
The economists at Bank of Baroda said, in a webinar titled ‘Indian Economy FY24 – A Prognosis’, that they do not expect any rate cuts in FY24’s first half, but think the Reserve Bank of India (RBI) may cut/lower interest rates by 50 basis points in the second half.
I would look at the stance changing to neutral before the rate cut,” said Madan Sabnavis, chief economist at Bank of Baroda, on Friday.
According to the economists, the inflation reading in India will remain moderate. They expect CPI inflation to moderate to 5.5% from 6.7% in FY23.
Aditi Gupta, an economist at Bank of Baroda, said that if El Nino persists, it may affect summer crops.
Growth gears for India-RBI cut Interest Rates
BoB economists expect India’s GDP to grow at about 6.5% in FY24, which is slightly higher than the IMF’s prediction of 5.9%. However, SBI Ecowrap expects growth at 7.1%, which is in line with NSSO’s prediction.
As SBI Ecowrap points out, India is likely to pursue a different path of focusing on drivers of growth, looking for a renewed surge in resilient manufacturing, while supporting the services sector.
Domestic consumption and investment will benefit from increased agricultural and allied activities, stronger business and consumer confidence, and strong credit growth, while supply responses and cost conditions are likely to improve as inflationary pressure eases,” SBI said.
Challenges
Despite the expectation of a slowdown in the global economy, BoB believes the Indian economy will remain resilient.
India is primarily a domestic economy, but it needs rural demand, job creation, and other factors to function,” said Sabnavis, who added that El Nino is causing uncertainty in the agriculture sector.
BoB economists noted that downside risks to agriculture include a possible heatwave from El Nino impact, unseasonal rainfall, late monsoon departure, and spatial distribution of rainfall.
There are expectations that India’s bank credit will grow between 12-14% in FY24, matched by a healthy growth of 11-12% in deposits. FPI inflows are also expected to turn positive.
Investors will be left with fewer funds to choose from as a result of quantitative tightening in international markets, but the risk of recession may cause them to look for safe havens. Both factors will influence how much foreign inflows India receives this year (FDI and FPI), according to economists.
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