Government spending should pick up compared to first half, particularly on the capital expenditure side, and better crop prospects that also does bode well for agriculture production and rural demand, but in the overall scheme of things we do think that India is dealing with tight monetary policy, tight credit policy, tight credit conditions, and now tight liquidity conditions and you have the external environment looking a lot more hostile. So, we see downside risk to our forecast of 6.7%.
In the backdrop, I wanted to understand what exactly are you pencilling in for the inflation because yes, you also have the RBI governor who had indicated that for the month of October we would see an elevated number when you talk about the CPI inflation print. But what are you pencilling in for CPI trajectory going ahead for India in particular?Sonal Varma: Well, we think inflation has peaked. The October reading of above 6 was a surprise. But one clear trend we have seen in the last 12 months is this big divergence between food prices and core inflation. The trajectory on core remains quite benign and all indicators point to both goods and services core inflation remaining low. Now, on food, some early evidence of veggie prices correcting, edible oil prices are still elevated, but probably we will see some correction on that in the month of December. And as the rabi sowing picks up, we should start to see some moderation in wheat prices as well. So, a moderation in food inflation which has been quite elevated is likely along with lower core inflation. So, we think the trajectory is down. Now, for the full financial year, though, given the upside in vegetable prices, the full year projection is tracking somewhere in the 4.6% to 4.8% range compared to 4.5% that the RBI had given in its previous guidance.
So, what does all of this mean for the impending MPC meet in the coming week? And I ask you that because when we have been speaking with experts, you probably just heard Rama Bijapurkar talk about how incomes are something which is saturating a bit because I guess the public infrastructure spend was a bit lower in the first half of the year or when we spoke with Mr Mariwala, who said that there is definitely a problem where consumption has stagnated and the RBI or the government will have to do something to loosen its string and purses with respect to that. Given all of this, what is the expectation for the second half of the year when it comes to public expenditure as well as the rate action from the RBI? Still a shallow cut or it could be a bit deeper looking at the problem?Sonal Varma: Big picture, our view is India has entered a cyclical growth slowdown and typically this tends to last for 6 to 12 months. So, our view is risk to growth is to the downside even in the second half of FY25. And there are a few factors that are at play.
One is, as you said, consumption is moderating. I think the pent-up demand post pandemic is behind us. We are seeing a moderation in income growth and the tighter credit availability in terms of consumer credit because of the macroprudential tightening, so that is weighing on consumption. And when you have softer consumption, the incentive for firms to actually put up capex goes down and a lot of companies are also facing the pressure because of these imports coming in from China, so that is weighing on investment.
And third is really on the external side, trade volume growth we think is going to be softer because of increased uncertainty. So, the risk to growth are clearly to the downside. And the inflation outlook in our view, the food problem is actually fairly concentrated in certain buckets. Bulk of the CPI basket is very well aligned to the RBI’s 4% target and we do not see any signs of second round effects.
So, our view is that monetary policy is tight and needs to ease. Now, the comment from the RBI still appears to be on the hawkish side. So, the base case is that the RBI stays on hold next week. But the extent of growth sacrifice underway in our view also means that it is going to be a deeper rate cutting cycle.
So, we have 100 basis point in total cuts in 2025 in our baseline. The other thing to watch is what is happening on liquidity because of the FX intervention banking system liquidity has tightened and the central bank needs to reverse that tightness given we are in neutral stance and given the impact that tight liquidity has on the growth outlook. So, some measures to ease banking system liquidity could potentially come through next week.
Given the fact you are saying that next week it is going to be a bit of a hold, do you think that could mean that the cycle of cyclical slowdown that you said typically lasts for 6 to 12 months, could it be longer? Could it be a little too late that perhaps RBI would have acted that deep rate cut cycle that you talked about of 100 basis point? Could that mean that there could be a deeper slowdown which could extend more than 12 months?Sonal Varma: That is definitely possible. We know that monetary policy works with a lag of three to four quarters, so anything we do today is actually going to have any impact in the second half of FY26. So, we do discuss FY25 a lot, but as you said rightly, a lot of this is going to spill over into FY26 as well. So, along with the downside risk we see for FY25, we do think that there could be downside to FY26 growth projections as well. We currently have a 6.8% for FY26, but that is also potentially at risk of seeing downside because of these moving parts in terms of softer consumption demand, what it means for investment and the external environment we are in. Therefore, we do think a course correction on monetary policy is the need of the hour.
So, you are expecting a further downside. You said the risk to the growth is on the downside and if this also continues, would that make you also go ahead and change your growth forecast further or cut your growth forecast further for the India growth? 6.7% is what you are estimating at this point in time, right?Sonal Varma: Yes, we have a 6.7 for FY25 and 6.8 for FY26. So, let us see what today’s number brings in terms of the details. Second, post Diwali to what extent there is a rebound or not is something we are monitoring as well. And third is in terms of policy action from the RBI is also something will be an input into our forward view. And finally, the global outlook in terms of Trump 2.0, what kind of tariffs are imposed or not, the timing of that and what that means for exports and global growth is something we will need to incorporate as well. So, yes, we are watching all those things. But as I said, the way things are panning out, we definitely see downside risk to both FY25 and FY26.
