Expert view: RBI may implement shallow rate cut even if US Fed defers, says Rajani Sinha of CareEdge

Expert view: Rajani Sinha, Chief Economist at CareEdge Ratings, says weak consumption, a poor monsoon, and global risks could impact India's growth prospects. She suggests that the RBI may proceed with a rate cut, even if the US Fed defers, provided domestic inflation moderates. In an interview with Mint, Sinha discusses the state of the Indian economy, emerging trends, and the impact of AI technology.

Edited excerpts:

What is the outlook for the Indian economy for the current financial year? What can derail the growth momentum?

The high-frequency economic indicators like GST collection, car sales, and PMI show continued growth momentum in the Indian economy. 

However, weak consumption concerns linger.

If we get a normal monsoon this year, that should help stabilise food inflation and improve consumption demand, specifically rural consumption. 

The government’s focus on investment is expected to continue this year. 

While private investment remains feeble, it could improve in the next few quarters with rising capacity utilisation levels. 

However, the critical requirement for that will be a sustained and broad-based improvement in consumption. 

The private sector shows increased intent to invest, as reflected by CMIE data on announced investment projects. 

While India’s services exports have remained healthy, merchandise exports are expected to improve as global trade gathers momentum. 

India’s GDP growth will likely moderate in FY25, but it will remain healthy at around 7 per cent. 

Normal monsoons with healthy spatial and temporal rainfall distribution will be critical for agriculture, specifically when reservoir levels are very low. 

Healthy monsoons are critical to pushing up rural demand, which has been feeble since the pandemic. 

A normal monsoon will also aid in containing food inflation that remains high. 

In June, the monsoons have been below the LPA (long-period average); however, it could improve in the next few days. 

We must also remain cautious of global risks, given that global growth is still precarious and geopolitical concerns linger.

Inflation is easing, but do you think it will fall below the RBI's short-term target of 4 per cent anytime soon?

Inflation has been moderating in the last few months, with core inflation remaining below RBI’s 4 per cent target for the last five months. 

However, food inflation remains high at 7-8 per cent, with high double-digit inflation in vegetables and pulses. 

Normal monsoons with good rainfall distribution will be critical for bringing down food inflation. 

We also need to be watchful of global commodity prices. 

Global industrial metal prices have risen by around 9 per cent in the last three months. 

Ongoing geopolitical tensions must be monitored, given the risk they can pose to global supply chains and commodity prices, specifically global crude oil prices. 

CPI inflation will likely moderate further and slip below RBI’s target in July-Aug, supported by the base effect. 

However, it is estimated to rise again to around 5 per cent level in Q3 and Q4. We estimate average CPI inflation around 4.5-4.8 per cent in FY25. 

Keeping CPI inflation at RBI’s target of 4 per cent on a sustained basis will be challenging.

Can the RBI cut rates before the US Fed? When can we expect a rate cut?

RBI has reiterated that domestic factors will be critical for their policy decision, even while they will be watchful of actions taken by global central banks. RBI is likely to continue focusing on domestic inflation. 

As core inflation has been moderating, the critical factor would be food inflation. 

If food inflation moderates and there is no supply-side push to global commodity prices, we could see RBI going for a shallow policy rate cut by the end of the current year. 

With signs of moderation in US inflation, the Federal Reserve will also likely go for a policy rate cut in the second half of 2024. 

However, even if the Federal Reserve defers the rate cut decision, RBI may still go ahead with the rate cut, provided domestic inflation moderates. 

India’s external sector is in a comfortable position, with strong FII inflows expected as India gets included in global bond indices. Forex reserves are at a comfortable level of around US$ 653 billion. 

Hence, the RBI could proceed with a shallow rate cut, even if the US Fed defers a rate cut. 

The most critical aspect for India’s central bank would be sustained moderation in domestic inflation.

Slowing consumption has been a concern. How can we see a rise in consumption? What steps can the current government take to boost it?

Weak consumption, specifically in the lower-income category and rural areas, has been a cause of concern for the Indian economy. 

Consumption GDP has grown by 4 per cent in Q4FY24, against a pre-pandemic level of around 7 per cent growth. 

As we advance, rural demand will likely improve based on the assumption of normal monsoons in the current year. 

Subsequent containment of food inflation will also help improve consumption spending. 

There has been an improvement in consumer sentiments, as reflected by RBI’s household survey. 

However, good monsoons and containment of food inflation would be critical elements for broad-based improvement in consumer spending in the near term. 

Over a longer period, the most crucial aspect would be improving the employment scenario. 

This will help improve consumer sentiments on a sustained basis. 

The new government should focus on creating more job opportunities in the organised and unorganised sectors. 

It will also be critical for the government to equip the population adequately to enable them to get absorbed into the labour force. 

The government’s focus on capex should also help propel the economy through a multiplier effect. 

In the near term, the government should consider giving some tax reliefs to the lower-income category to boost consumer sentiments and propel consumption spending. 

The government has the challenging task of balancing fiscal prudence while continuing to focus on capex-induced growth. 

Keeping that in mind, it will be a tightrope walk for the government.

How critical is the monsoon for the Indian economy? What does an above-normal monsoon mean for the Indian economy?

Agriculture contributes around 15 per cent to India’s GDP, but a large part of India’s workforce (around 46 per cent) is employed in agriculture. 

Hence, normal monsoons are critical not just for agriculture sector output but also have a strong bearing on overall rural demand. 

Good monsoons are much required not just for the Kharif crop but also for the Rabi crop, as reservoir levels are currently very low due to poor monsoons last year. 

Rural demand has been weak, even due to the poor monsoon season last year. 

While in the last few months, there has been some recovery in rural demand, a normal monsoon this year would be critical to ensure sustained and meaningful recovery in rural demand. 

Rural demand has a strong bearing on sectors like FMCG, cement, paint, auto and consumer durables. 

Normal monsoons with good spatial and temporal distribution of rainfall will also help reduce high food inflation. This, in turn, will help boost the economy's overall consumption.

Can we see some short-term negative impacts on the cement and paint sectors due to the monsoon?

Historically, paints and cement sales have been observed to remain lowest in the second quarter of the financial year due to the monsoon and gradually pick up by the end of the second quarter. 

A similar trend is expected in this financial year as well. However, over a longer period of time, both sectors should benefit from normal monsoons and recovery from rural demand.

What do you think about AI's emergence? How can we leverage it to boost the Indian economy?

The emergence of AI has positive and negative implications, especially for a labour-abundant economy like India. 

On the positive side, the emergence of AI will lead to productivity improvement and increased efficiency. 

On the flip side, it could result in some jobs getting redundant. This becomes critical at a juncture when employing India’s large workforce is already a challenge. 

The best way to leverage AI would be by moving up the value chain in the technology sector. 

India has the benefit of a large STEM (science, technology, engineering, and mathematics) workforce and has already made rapid progress in digitalisation. 

We should increase our focus on R&D to ensure that we have an edge and that our workforce is adequately skilled to participate in the evolution of AI. 

We should leverage AI to create more jobs in emerging sectors and improve productivity in traditional sectors.

Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.