The Reserve Bank of India's December Policy Meeting is currently in session. While all eyes are on Governor Shaktikanta Das's comments on December 8, UBS expects the repo rate to remain steady and the RBI to maintain a hawkish tone.
"Despite the recent softening in headline CPI inflation and comfortable core inflation, we expect RBI to remain cautious and maintain a hawkish tone in the upcoming December policy review amidst resilient economic activity, strong credit growth, elevated basic balance deficit, and above target CPI inflation," said Tanvee Gupta Jain, Economist at UBS. Going forward, we anticipate headline CPI inflation to remain in the 5-6% range between November 2023 and March 2024, with full-year inflation of 5.5%YoY (UBSe) in FY24.
We maintain our base case that the repo rate will be held steady in the December policy. We expect the MPC to signal that it will continue to manage interbank liquidity (even though pressure to carry out OMO sales has decreased due to tight interbank liquidity) in order to keep the overnight rate above the repo rate in the coming months."
UBS, on the other hand, is bullish on India's GDP growth prospects. "We recently raised our FY24 real GDP growth forecast for India to 6.7% (from 6.3% previously)." We do note, however, that growth momentum in India has so far held up despite global headwinds,' Gupta added.
She went on to explain how the UBS economics team expects global growth to be somewhat lower in 2024 than in 2023, owing mostly to the United States and China. "Despite slower global growth, we expect the Indian economy to maintain 6.2% YoY real GDP growth in FY25E. We expect consumption growth to gradually normalize as corporate wages soften, personal loan growth flattens, government post-election welfare spending peaks, and the lag effect of monetary tightening on households' disposable income," Gupta noted.
They anticipate that the increase in capex spending will be more widespread: "While public capex is likely to stabilize due to stretched government finances, we expect private corporate capex and residential housing demand to continue improving." Finally, while exports may improve modestly, they are likely to remain weak and dependent on global growth uncertainty," she stated.
According to UBS, India's potential growth rate in the medium term will be 6.0-6.5% YoY, which is higher than their previous projection of 5.75-6.25%. Gupta explained that "significant digitalisation adoption, easing financial sector weaknesses, and the government's reform agenda to support India's integration into global value chains" are driving that momentum. However, concerns remain, including providing enough jobs for the growing working-age population, a less favorable external climate, and the automation overhang."
