Goldman Sachs raises India growth forecast on RBI dividend windfall

US-based asset manager Goldman Sachs has raised its growth forecast for India by 10 basis points (bps) to 6.7% following the Reserve Bank of India’s (RBI’s) decision to transfer a “higher than expected” dividend to the government. One basis point is one-hundredth of a percentage point.

Goldman Sachs said it sees a nascent recovery in rural consumption and a sustained momentum in urban consumption indicators propping up growth, while the investment growth momentum is expected to sustain with extra fiscal space for infrastructure spending, given the higher than expected dividend transfer.

Core inflation has averaged 3.4% year-on-year (y-o-y) in the first four months of the year. “We expect this to bottom out in Q2 and increase towards 4.0-4.5% y-o-y in the second half of the year. This is mainly driven by our view of an uptick in core goods inflation due to the lagged impact of manufacturing cost increases,” it added

Based on these factors, the asset manager said it is pushing its RBI rate cut call back by one quarter and now expects a cut in interest rates in the December quarter against its previous forecast of a reduction in the September quarter.

“We push our RBI rate cut call back 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 RBI, with 25 bps rate cuts each in Q4 CY24 and Q1 CY25,” it said in a note.

The timing of the first rate cut “remains a difficult question” as domestic growth remains strong, which, along with sticky trajectory for food inflation has meant that some members of the RBI’s monetary policy committee (MPC) may be reluctant to pivot towards monetary policy easing, it noted.

MPC members have sounded cautious on sticky food inflation owing to supply side disruptions amid the ongoing hot weather conditions in many parts of India.

“In our view, they may want to see progress of the monsoons and sowing of the summer (kharif) crop to assess the food inflation trajectory in 2H CY24, before pivoting towards monetary policy easing,” Goldman Sachs economists said in the note.

Meanwhile, the Indian Meteorological Department (IMD), in an update on Monday, said it expects the monsoon to make a landfall in Kerala by this week-end, while adding that most parts of the country are likely to receive above normal rainfall during the June-to-September monsoon season.

The asset manager’s note, penned by Santanu Sengupta, Arjun Varma and Andrew Tilton also said its US economics team pushed back its forecast for the US Federal Reserve’s first rate cut forecast by one meeting to September (from July previously) but still expect two rate cuts this year, with the second rate cut in December. “Our US economists continue to see rate cuts from the Fed as optional, which lessens the urgency to commence the easing cycle,” the note said, while pointing to strong purchasing managers indices in May, lower jobless claims and hawkish commentary by Fed officials.