Goldman Sachs ups India 2024 GDP forecast to 6.7%; sees RBI rate cut in Q4

RBI's MPC has sounded caution on sticky food inflation, Goldman Sachs says, owing to supply-side disruptions due to the ongoing hot weather conditions in many parts of India

Goldman Sachs revised upwards its forecast for India's gross domestic product (GDP) growth for calendar year 2024 (CY24) by 10 basis points (bps) to 6.7 per cent.

It expects the Reserve Bank of India (RBI) to cut interest rates during the fourth quarter of the current calendar year (Q4-CY24)/ third quarter of the current financial year (Q3-FY25).

India's, core inflation averaged 3.4 per cent year-on-year (Y-o-Y) in January 2024 till April, which, analysts at Goldman Sachs said, is expected to bottom out in the second quarter Q2-CY24.

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It may rise to the 4–4.5 per cent mark in the second half of CY24.

This belief, they said, was mainly driven by their view of an uptick in core goods inflation due to the lagged impact of manufacturing cost increases.
 

The Monetary Policy Committee (MPC) has sounded caution on sticky food inflation, Goldman Sachs said, owing to supply-side disruptions due to the ongoing hot weather conditions in many parts of India.
 

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The RBI, their analysts believe, may want to see progress of the monsoon and sowing of the summer (kharif) crop to assess the food inflation trajectory in the second half of CY24, before pivoting towards monetary policy easing.
 

“Going forward, we expect investment growth momentum to sustain with extra fiscal space for infrastructure spending, given a higher-than-expected dividend transfer by the RBI. As a result, we recently revised our growth forecast for CY24 slightly higher by 10 bps to 6.7 per cent Y-o-Y,” wrote Andrew Tilton, chief Asia-Pacific economist and head of EM economic research at Goldman Sachs in a note co-authored with Santanu Sengupta and Arjun Varma.

Taking into account the above developments, Goldman Sachs has pushed back its expectation of a cut in interest rate by the RBI by one quarter to Q4-CY24 (vs. Q3 earlier), with the first cut most likely in the December 2024 meeting.
 

“We continue to expect a shallow easing cycle of total 50 bps rate cuts from the RBI, with 25 bps rate cuts each in Q4-CY24 and Q1-CY25,” Tilton, Sengupta and Varma wrote.

The US Federal Reserve

Goldman Sachs' US economics team has also pushed back its forecast for the Fed’s first rate cut forecast by one meeting to September (from July previously). It still expects two rate cuts in CY24, with the second rate cut in December.

“Strong May PMIs, lower jobless claims and hawkish commentary by Fed officials, in particular Governor Waller, raised the bar higher for a rate cut in July,” Goldman Sachs' analysts said.

Meanwhile, minutes of the recent Federal Open Market Committee (FOMC) showed that the US central bank was willing to hike rates, if necessary.

This, analysts said, was in sharp contrast to the Fed chair Jerome Powell's remarks that the committee was not thinking about hiking rates.


 

The US economy, according to Philip Marey, senior US strategist at Rabobank International, is heading towards stagflation, from the current situation of persistent inflation and GDP growth slowdown.
 

“Anyway, the window of opportunity for rate cuts is narrow. If Donald Trump returns as US President – which is our current baseline scenario based on the opinion polls – we are likely to see a new inflationary impulse from a universal tariff in 2025. This should stop the Fed’s cutting cycle in its tracks,” he said.