RBI MPC Meeting: What does India’s Q2 GDP print mean for the monetary policy? Experts weigh in
- RBI MPC Meeting begins today: RBI Governor Shaktikanta Das-led rate-setting panel began its three-day meeting on Wednesday, December 4, to decide on interest rates and its upcoming policy stance.
RBI MPC Meeting: Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the fifth monetary policy of the current financial year 2024-25 (FY25) on Friday, December 6, after a three-day meeting which began today, December 4, 2024. The RBI's rate-setting panel will observe the impact of global headwinds and economic determinants, such as the recent slowdown in India's gross domestic product (GDP) and the rise in food inflation.
The review by the six-member Monetary Policy Committee (MPC) led by Das seeks to strike a fine balance between sustaining growth and keeping inflation under the four per cent target. In its last policy meeting, the MPC kept the benchmark repo rate unchanged at 6.5 per cent for the tenth straight meeting. However, the MPC changed the monetary policy stance to ‘neutral’ from ‘withdrawal of accommodation’ in the October meeting.
India’s GDP growth in the July-September quarter of the current fiscal (Q2FY25) was below D-Street estimates, and the slowdown was broad-based. Economists say even as H2 growth picks up to around 6.5 per cent, growth is expected to be below potential in the near term and requires a policy push. According to ICICI Bank research, the MPC would have to revise its FY25 growth forecast lower from 7.2 per cent year-on-year (YoY).
India's Q2 GDP print, H2 outlook
India’s Q2FY25 GDP growth was negatively surprised at 5.4 per cent YoY, with the deceleration led by moderation in investment spending at 5.4 per cent YoY compared with 7.5 per cent YoY in Q1. According to ICICI Bank, lower investment spending when the Centre’s capex has seen a pick-up in Q2 shows that private investment growth has been relatively lower than in Q1.
According to economists, India's Q2 GDP print implies policy impulse on the way. Private consumption, too, has dropped to six per cent YoY from 7.4 per cent YoY in Q1. Government spending has increased to 4.4 per cent YoY from -0.2 per cent YoY in Q1, with government spending increasing post-election.
Within the industry, mining contracted at -0.1 per cent YoY (7.2 per cent YoY in Q1), manufacturing at 2.2 per cent YoY (seven per cent YoY in Q1) and electricity at 3.3 per cent YoY (10.4 per cent YoY in Q1). Even manufacturing activity was impacted, and muted corporate earnings also point to weakness in the manufacturing sector, which will likely continue soon.
On the other hand, agriculture growth picked up to 3.5 per cent YoY, an increase compared with two per cent YoY in Q1. Given that Kharif output is expected to see a sharp uptick at 5.7 per cent YoY and even rabi output should be much higher than last year, the outlook for the agriculture sector is positive.
"With a subdued H1 behind us, a more promising H2 lies ahead. We revise our FY25 real GDP growth forecast by 40 bps to ~6.6 per cent YoY, reflecting near-term softness in indicators, and project ~6.4 per cent for FY26," said SBI Capital Markets.
In October, India’s retail inflation accelerated to a 14-month high of 6.21 per cent YoY. The increase is driven by food inflation which moved to a 15-month high of 10.9 per cent YoY. Within food inflation, vegetable prices were running at a 57-month high of 42 per cent YoY, driven by tomato (161 per cent YoY), potato (65 per cent YoY) and onion (52 per cent YoY).
On a positive note, vegetable prices declined by 7.2 per cent sequentially in November, driven by tomatoes (-21 per cent sequentially). Edible oil prices have also eased by 3.6 per cent MoM, which economists say should lower the headline inflation in the coming months.
Most economists say the H2 economic growth will be higher than that of H1. October has started on a positive note for the economy, with a number of high-frequency indicators reporting an uptick. For instance, diesel sales peaked in October, and vehicle sales rose during the festive season.
“A sharp rebound in H2FY25 is expected, driven by government and private capex, robust agriculture growth, and buoyant consumption demand, with GDP growth projected at 6.6-6.8 per cent for FY25,” said Jahnavi Prabhakar, Economist, Bank of Baroda.
India’s goods exports accelerated to a five-month high in October, rising by a solid 17 per cent YoY. Notably, this is the highest growth seen in the last 28 months. Electronics goods rose by 46 per cent YoY to an all-time high in October. Other factors supporting growth in H2 would be government spending, which picked up in October, along with an expected decline in food inflation, which should prop up urban discretionary consumption.
"Despite H1’s lower-than-expected growth of six per cent, we expect H2 to improve, with 7.7 per cent and 8.1 per cent growth in Q3 and Q4, respectively. While Q2's headline figure was low, India's growth momentum remains stable. Consumption growth, though lower, is healthy at six per cent, and public capex from states and the Centre is expected to increase to meet budgeted targets," said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
How will India's Q2 GDP print impact RBI MPC's decision?
H1 growth now stands at six per cent, and H2 growth is expected to stabilize around 6.5 per cent, which implies growth of 6.3 per cent in FY25. This is lower than RBI’s estimate of 7.2 per cent and thus would require a sharp reduction in RBI’s growth estimate for FY25. Even FY26 growth is now expected to stabilize at 6.6 per cent from 6.8 per cent earlier.
According to ICICI Bank, the MPC is expected to revise its near-term and FY25 projections higher. The US election outcome would imply an upside risk to domestic inflation in terms of increased imported inflation due to INR depreciation, which will increase the cost of imports.
“Given Q2 growth is sharply lower than RBI and consensus estimates, MPC would have to revise its FY25 growth trajectory lower from 7.2 per cent YoY,” said ICICI Bank. According to the bank, MPC would have to revise Q3 inflation from 4.8 per cent to 5.5 per cent and retain Q4 inflation around 4.2 per cent. It would have to revise the FY25 inflation estimate from 4.5 per cent.
According to domestic brokerage Elara Capital, India's Q2 GDP release raises the possibility of a rate cut decision in December. While we lean towards a 25 bps rate cut in December, the recent optimistic growth pronouncements by the RBI governor and expression of concern regarding elevated and sticky inflation shall make it somewhat difficult for the RBI MPC to swiftly change its assessment.
"In light of the recent spike in the CPI inflation, we anticipate a status quo from the MPC next week. However, with the GDP growth print sharply undershooting the Committee’s expectations, a February 2025 rate cut may be on the table if the next two inflation prints recede," said Aditi Nayar, Chief Economist and Head - Research & Outreach, ICRA Limited.
Also Read: RBI Policy: MPC meeting begins today; will the central bank cut the repo rate? Experts weigh in
According to Radhika Rao, Senior Economist and Taimur Baig, Chief Economist of DBS Bank, despite an anticipated moderation in November’s inflation, 3QFY (4Q24) average will be at least 60-70 bp above the RBI’s 4.8 per cent projection for the quarter. This growth-inflation divergence will put the RBI MPC in a bind ahead of Friday’s policy meeting.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, and not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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Business NewsEconomyRBI MPC Meeting: What does India’s Q2 GDP print mean for the monetary policy? Experts weigh in
First Published:4 Dec 2024, 09:02 PM IST
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