Balanced Policy With Focus On Liquidity: Expects CareEdge Ratings From MPC Meeting

The upcoming monetary policy committee (MPC) meeting of the Reserve Bank of India (RBI), slated for this week, marks the first meeting of this fiscal year. The meeting is set against a backdrop of stronger-than-expected economic performance despite pressures in specific segments of the economy. Robust economic performance is underscored by the fact that FY24 growth is now seen at 7.6 per cent, as per the advanced estimates of ministry of statistics and programme implementation (Mospi), led by strong growth in the investment demand.

Gross Fixed Capital Formation (GFCF), which is a proxy for investment growth, is projected to expand by a healthy rate of 10.2 per cent in FY24. In terms of sectoral growth, industrial growth is estimated to outshine with a projected expansion of 9 per cent in FY24, with an acceleration from 2.1 per cent in the previous year. The services sector, commanding the highest share in India's gross value added (GVA), is also anticipated to sustain its momentum, projecting a 7.5 per cent expansion driven by financial services, real estate, and professional services, as well as public administration, defence, and other services.

"Robust high-frequency indicators of the Indian economy also underpin this strong economic momentum. As shown by the PMIs for manufacturing and services, the outlook in the organized sector remained in the expansionary zone. Industrial production grew by 5.9 per cent during April 2023 to January 2024 compared to 5.6 per cent in last year's corresponding period. Infrastructure and construction goods output supported the overall IIP with an expansion of 10 per cent during April 2023 to January 2024 compared to 8.5 per cent last year," stated CareEdge ratings in its report.

E-way bill collections rose 18.9 per cent YoY in February, up from 13.2 per cent YoY in December. In February 2024, automobile sales surged by 24.3 per cent year-on-year (YoY), supported by a notable uptick in two-wheeler and passenger vehicle sales. As per CMIE's data, the all-India unemployment rate averaged 7.4 per cent in Jan-Feb 2024, lower than 9 per cent in Q3 FY24. The improvement in the employment conditions in the first two months of 2024 was visible in both urban and rural areas, where it averaged 8.7 per cent and 6.8 per cent, respectively, lower than the Q3 FY24 average of 9.3 per cent and 8.8 per cent.

"The improvement in rural labour market conditions was also underscored by four months of consecutive contraction in MNREGA job demand (persons). Other high-frequency data of economic growth, like retail credit growth and GST collections, continue to remain robust," the report added.

While the overall economic performance remains robust, there are notable challenges, particularly at the bottom of the pyramid. Private consumption demand within the economy is anticipated to exhibit a tepid trajectory, with the growth rate estimated to decelerate from 7.1 per cent in FY23 to 3 per cent in FY24. This marks the slowest consumption growth in the past two decades, excluding the pandemic year of FY21, when it contracted by 4.6 per cent. The significant deceleration in private consumption, a driver of over 50 per cent of the GDP, raises concerns. Weather-related disruptions have impacted the agriculture sector, where the growth is expected to fall to 0.7 per cent in FY24, lower than the decadal average of 4.1 per cent.

Slower growth in agricultural production impacts rural demand and raises concerns about higher food inflation, contributing to elevated inflation expectations. Despite these challenges, recent initiatives such as the reduction in LPG prices and the extension of the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), recent reductions in fuel prices coupled with supply-side measures to alleviate inflationary pressures in the food basket, are anticipated to provide some relief to the consumption sector. Based on the final data on Rabi sowing, the marginal increase in acreage will provide some comfort for the agrarian economy.

CareEdge ratings anticipate the economic momentum to persist in the next fiscal year as well. The government's sustained emphasis on capex and improving external situations will bolster the economic momentum. It foresees a recovery in the rural demand, which has already shown early signs of revival. The World Meteorological Organization's reports of weakening El Nino conditions and early projections of a normal southwest monsoon augur well for a robust recovery in the agricultural sector. A normal monsoon holds key for agricultural output as reservoir levels continues to remain low especially in the eastern and southern India. Against the backdrop of improved economic outlook, the rating agency project a 7 per cent GDP growth in FY25 and expect the RBI to retain its growth projections. Having said that, a marginal increase in growth projections for FY25 cannot be ruled out completely as RBI’s internal model shows a growth of 7.4 per cent in FY25.