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Business News/ Markets / Stock Markets/  Cautious of headwinds to domestic demand; inflation to average 5.7% in 2023, says Aurodeep Nandi of Nomura
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Cautious of headwinds to domestic demand; inflation to average 5.7% in 2023, says Aurodeep Nandi of Nomura

Aurodeep Nandi of Nomura expects inflation to average 5.7 per cent YoY in 2023 and 4.4 per cent for 2024.

Aurodeep Nandi, India Economist and Vice President at Nomura (Nomura)Premium
Aurodeep Nandi, India Economist and Vice President at Nomura (Nomura)

Aurodeep Nandi, India Economist and Vice President at Nomura says he is cautious of headwinds to domestic demand from weaker rural demand, a likely slowdown in government capex as the election cycle heats up and spillovers from sluggish global growth. In an interview with Mint, Nandi shares his views on the inflation trajectory and how an economic slowdown in the US can impact us. Edited excerpts:

What is your view on the Indian economy?

The latest GDP data for Q2 2023 saw private consumption and fixed investment drive stellar growth of 7.8 per cent year-on-year (YoY) from 6.1 per cent in Q1. 

High-frequency indicators suggest that this momentum seems to have persisted into Q3, although there seems to be some softening in data in September compared to the performance in August. 

Consumption continues to recover, although it is still K-shaped (for instance, there is stronger demand for SUVs than smaller cars and two-wheelers). 

We are also witnessing slower demand for discretionary goods, although news reports suggest that festive sales in October look promising. 

Investment indicators so far speak of robust performance but seem primarily driven by the public sector. 

Both, merchandise export and import growth contracted in September compared to relatively stronger growth rates in August, along with moderation in services exports. 

The monsoon season has concluded with cumulative rainfall a shade ‘below normal’ but the skewed distribution could impact agri output this year. 

We remain cautious of headwinds to domestic demand from weaker rural demand, a likely slowdown in government capex as the election cycle heats up and spillovers from sluggish global growth. 

We maintain our GDP growth forecast at 6.3 per cent YoY in 2023 and 5.5 per cent in 2024 (FY24: 5.9 per cent; FY25: 5.6 per cent).

Prodigal inflation has returned home to RBI’s comfort zone of below 6 per cent, with the September reading sliding to 5 per cent YoY in September from 6.8 per cent in August, far below market expectations of 5.4 per cent. 

This was owing to a strong deflation in vegetable prices, lower fuel inflation (LPG cylinder price cuts), and a sharper dip in core inflation to 4.5 per cent from 4.8 per cent. 

However, broader food inflationary pressures are still a worry – especially rising price pressures for pulses, rice, wheat, sugar and spices, which face upside risks from poor monsoons. 

Second-round effects have, however, so far been muted and the government is proactively undertaking supply-side measures. 

We expect inflation to average 5.7 per cent YoY in 2023 and 4.4 per cent for 2024 (FY24: 5.4 per cent, FY25: 4.5 per cent).

Also Read: S&P 500 is down 10% in 3 months; should Indian investors be worried?

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How can a slowdown in the US impact us?

A slowdown in the US at a time when Europe is already facing growth headwinds and China is struggling means that there is a risk of a more protracted slowdown globally. 

For India, the key vulnerability is on the export side, with the US being a key market not just for India’s merchandise exports, but also for its services exports. 

It is rather telling that IT companies have recently sounded cautious on global macro headwinds and are reassessing their headcount needs, highlighting how a hit to exports could end up having ripple effects impacting employment and in turn consumption demand. 

In the past, we have also seen India’s capex cycle struggle when global conditions worsen. 

The key question for markets is whether the US is looking at a ‘soft landing’, a ‘hard landing’ or a ‘crash landing’. 

The resilience in concurrent macro data makes it difficult to say for sure which scenario will emerge.

Also Read: Indian equities will deliver double-digit returns in the next 2-3 years, says Pranav Haridasan of Axis Securities

What are your views on the Chinese economy? How can it impact us in a positive or negative way?

After hitting a historical high in the second half of 2020 (H2 2020) and the first half of 2021 (H1 2021), China’s property sector experienced an unprecedented correction. 

With the confidence of households and investors damaged, the property sector is still seeking a real bottom. 

High-frequency data in October still show little signs of a real revival – while the contraction in new home sales has narrowed on improving transactions in big cities, low-tier cities still remain in deep contractionary territory. 

Domestic excavator sales also remain deeply negative, pointing to depressed demand for capital durable goods. Geopolitical tensions have also worsened with the US tightening curbs on AI chip exports to China. 

Our baseline view is that China is poised to experience a slowdown towards year-end or in early 2024 and we maintain our below-consensus 3.9 per cent forecast of 2024 annual GDP growth. 

India’s exports to China as a share of total exports are much lesser compared to other Asian economies, so the negative impact will most likely be more measured. 

Meanwhile, the shift in supply chains away from China is beneficial to India, although a lot will depend on India’s steadfast focus on reforms, infrastructure upgrades, upskilling of the workforce, and attracting foreign investment.

Also Read: Israel-Hamas conflict smaller in scale; uptrend in mid, smallcaps may resume, says Pankaj Pandey of ICICI Securities

How do you expect the inflation trajectory from here on? Can crude oil prices deal a blow to RBI's efforts? When do you expect a cut in interest rates?

We expect headline inflation to remain around 5 per cent through FY24 and core inflation in the 4-4.5 per cent range. That said, upside risks remain. 

Weak monsoons continue to pose a risk to food production and prices, with lower acreage (on a YoY basis) for pulses, cotton and oilseeds among kharif crops and lesser rain impacting water reservoir levels, and potentially lowering the yield of the coming wheat crop. 

On a YoY basis, inflation for items like cereals, pulses, milk, and spices is already trending at multi-year highs. 

On fuel, we expect oil marketing companies to keep petrol/diesel prices unchanged, ahead of coming state elections in Q4. For core, lagged effects of monetary policy tightening and base effects should moderate YoY core inflation further, in our view. 

As such we see downside risk to our baseline FY24 inflation projection of 5.4 per cent, which is in line with the RBI’s forecast and expect inflation at 4.5 per cent in FY25.

The US bond yields have seen strong gains lately. What is boosting US Treasury yields?

It is challenging to attribute a single reason as to why the yields have picked up so rapidly. 

It is probably a combination of a number of factors – greater market confidence in the US growth resilience, continued inflationary pressures, hardening of expectations that the Fed will keep interest rates higher for longer, and increasing worries on higher fiscal deficit in the US.

Also Read: US 10-year bond yields near 16-year high. How can it impact Indian stock market?

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 31 Oct 2023, 02:50 PM IST
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