Goldman Sachs revised upwards its forecast for India’s gross domestic product (GDP) growth for calendar year 2024 (CY24) by 10 basis points (bps) to 6.7 per cent, and expects the Reserve Bank of India (RBI) to cut interest rates in the fourth quarter of the current calendar year (Q4-CY24) / third quarter of the current fiscal year 2024-25 (Q3-FY25).
India’s, core inflation averaged 3.4 per cent year-on-year (YoY) in January till April 2024, which, analysts at Goldman Sachs said, is expected to bottom out in the second quarter Q2-CY24 and rise towards the 4 – 4.5 per cent mark in the second half of CY24. This belief, they said, was mainly driven by their view of an uptick in core goods inflation due to the lagged impact of manufacturing cost increases.
The MPC has sounded cautious on sticky food inflation, Goldman Sachs said, owing to supply-side disruptions due to the ongoing hot weather conditions in many parts of India.
The RBI, their analysts believe, may want to see progress of the monsoons and sowing of the summer (Kharif) crop to assess the food inflation trajectory in the second half of CY24, before pivoting towards monetary policy easing.
“Going forward, we expect investment growth momentum to sustain with extra fiscal space for infrastructure spending given a higher than expected dividend transfer by the RBI. As a result, we recently revised our growth forecasts for CY24 slightly higher by 10bp to 6.7 per cent YOY,” wrote Andrew Tilton, chief Asia-Pacific economist and head of EM economic research at Goldman Sachs in the note co-authored with Santanu Sengupta and Arjun Varma.
Taking into account the above developments, Goldman Sachs has pushed back their expectation of a cut in interest rate by the RBI by one quarter to Q4-CY24 (vs. Q3 earlier), with the first cut most likely in the December 2024 meeting.
“We continue to expect a shallow easing cycle of total 50 basis points (bps) rate cuts from the RBI, with 25bps rate cuts each in Q4-CY24 and Q1-CY25,” Tilton, Sengupta and Varma wrote.
The US Federal Reserve
Goldman Sachs’ US economics team has also pushed back its forecast for the Fed’s first rate cut forecast by one meeting to September (from July previously), but still expects two rate cuts in CY24, with the second rate cut in December.
“Strong May PMIs, lower jobless claims and hawkish commentary by Fed officials, in particular Governor Waller raised the bar higher for a rate cut in July,” Goldman Sachs’ analysts said.