MPC: Will RBI increase its FY24 GDP forecast of 6.5 per cent now?

The country’s Gross Domestic Product (GDP), a measure of economic output, surprised everyone by growing 7.6 per cent in the second quarter of financial year 2023-24 (Q2FY24). Real GDP grew at 7.8 per cent in the first quarter. 

In the October monetary policy, the Reserve Bank of India (RBI) had projected Q2 real GDP growth of 6.5 per cent, which turned out to be 110 basis points lower than the actual number released by the Ministry of Statistics and Programme Implementation (MoSPI).

The RBI has projected real GDP growth at 6.5 per cent for FY24, with the Q3 projection at 6 per cent and Q4 at 5.7 per cent. 

It’s likely that the RBI may revise its GDP forecast for the ongoing year, potentially adjusting it by 25-30 basis points from the current figure of 6.50 percent.

“Given the stronger growth momentum, there is a possibility that RBI revises its GDP forecast for the current year by 25-30 bps from the existing figure of 6.5%,” says Suman Chowdhury, Chief Economist, and Head of Research, Acuité Ratings & Research.

Elara Securities has said the most support for growth in the second half of FY24 is likely to come from public capex.

A note from Kotak Mahindra Bank has made a case for real GDP growth to average 6.8 per cent in FY24 and 6.3 per cent in FY25, with consumption staying weak for most of the current year, while investments face some headwinds as the central government reduces the pace of capex growth.

The higher growth has surprised the market as the interest rate tightening by 250 basis points has increased the interest rates of home, car, personal loans, and other credit products. Given the high inflation, households are getting impacted from both fronts. 

Last month, the RBI increased the risk weights on unsecured loans to tame the demand in high-risky assets, which will make the loan costlier. 

“The GDP growth trajectory currently is even higher than the potential growth of the economy, implying that it could continue to be a struggle by the RBI to bring Headline CPI inflation down to the desired levels of 4 percent on a sustained basis,” says a market player.

Unlike global economies, the Indian economy came back strongly from the Covid contraction of 5.8 per cent in 2020-21 to a growth of 9.1 per cent in 2021-22 and 7.2 per cent in 2022-23.

As per the projection , the real GDP is expected to grow by 6.5 per cent in both 2023-24 and 2024-25.

Post-Covid, there is a gradual fiscal consolidation path with a target fiscal deficit of 4.5 percent by 2025-26. This will slow down the pace of government capex in the coming years. 

While the corporate sector is sitting on cash with strong financials, the private capex is not showing any signs of picking up because of a global slowdown and geopolitical developments. 

Currently, the balance sheets of banks have seen improvement on the back of better asset quality and higher profitability.