MUMBAI: Even as it expects two rate cuts in the second half, rating agency Crisil has revised down its growth forecast to 6.8 per cent for this fiscal as it sees the high interest rate cooling off the urban demand, along with services growth thus offsetting the rural pick-up on one hand and moderate fiscal support due to a lower fiscal deficit target weakening the overall growth.
The forecast is sharply lower than the Reserve Bank’s assessment of GDP this fiscal at 7.2 per cent, which is in fact 20 bps more than the April forecast of the central bank, when revised the same in the June review after FY24 GDP surprised on the upside with an 8.2 per cent reading. Meanwhile, the earlier forecast was at 7 per cent.
Even though retail inflation jumped 5.1 per cent in June to a four-month high, due to a 9.8 per cent spike in food prices, the agency expects the price index to average at 4.5 per cent for the full year.
“Though the urban economy continues to be supported by robust credit growth, it is likely to cool off as rate hikes bite and services slow. Also, moderating fiscal support can cap growth, as the Centre reduces its fiscal deficit. The upcoming Budget will be watched for its nature of support to the economy.
Therefore, overall, we expect the economic growth to moderate to 6.8 percent this fiscal from the larger than forecast 8.2 percent in the previous year,” Dharmakirti Joshi, the chief economist at Crisil Ratings said in a note after the inflation surprised on the downside and industrial production did the same on the upside.
While ruling out any rate cut in the forthcoming August review, he expects the RBI to deliver two rates cuts in the second half.
On the 5.9 per cent IIP print for May – a seven month high-- over the 5 per cent in April, he said going forward, industrial growth can be lifted by improving consumption, as rural demand catches up on the back of healthy agriculture. But this will be offset by the likely cooling off in the urban demand.
The government on Friday said the consumer price index-based inflation for June rose to 5.1 per cent—highest in four months. Joshi stated that this corroborates the Mint Road position where the last mile of disinflation remains a challenge. May inflation stood at 4.8 per cent as food remained pricey.
Notwithstanding a supportive base effect from last year, food inflation surged to 9.4 per cent due to pricier vegetables, cereals, milk and fruits. Vegetables inflation, which has now remained in double-digits for eight months now, is a major worry as is rigidity in foodgrains inflation, he said.
On the other hand, non-food inflation eased for the 17th straight month, sliding to a record low of 2.3 per cent. But he warned that core inflation, the dominant part of non-food inflation, could see an upside in the coming months due to the recent firming up in international freight costs, crude prices and hikes in domestic telecom prices.
“Net-net, we expect decline in food inflation in the coming months to drag down headline inflation to an average of 4.5 per cent. That said, no rate cuts are expected in the forthcoming policy as RBI pursues a target of 4 percent durable inflation.”
On IIP he said consumer-oriented goods drove the growth, with consumer durables recording the strongest growth among the six major manufacturing categories, non-durables also rose after declining in April. But infrastructure, construction and capital goods slowed, indicating some cooling off in the investment momentum. Government capex has also slowed in May amid the elections.