With FY26 growth to stay likely to downshift to the 6% handle this year from a revised 9% pace in FY24, food disinflation setting in and successive measures to loosen macroprudential restrictions, policymakers have the room to maintain a dovish tilt, said Radhika Rao, Senior Economist and Executive Director at DBS Bank in an interview to Moneycontrol.
Hence, she expects a rate cut in April, with a likely shift in the stance to accommodative.
After better economic growth in Q3 at 6.2% compared to 5.6% in Q2FY25, Radhika Rao expects further improvement from Q3 to Q4FY25, but a sharper rebound is restrained by a weak credit growth impulse, moderating GST collection pace and tight financial conditions.
Do you expect economic growth numbers to exceed 6.5% in Q4 FY25?
Strong revisions to past data suggest that growth fared much better in FY23-FY24 compared to indications before, raising the base for FY25. To meet the revised FY25 projection at 6.5%, growth in the final quarter of the year will need to improve sharply above 7%. We are mindful of the likelihood of a one-off sharp lift in Q4FY25 GDP from a notable drop in subsidy payouts, which could provide a one-off fillip to real GDP vs a more tepid GVA (gross value added). In Q4FY25, further catch-up in government spending, consumption pick up on easing inflation, stronger farm output (~6% YoY) and positive lead indicators on rural demand are expected to help growth.
Add to this are reports of the Maha Kumbh festival being attended by millions, which could also provide a one-off boost to domestic activity, but hard to replicate in subsequent quarters. While we expect an improvement from Q3 to Q4FY25, a sharper rebound is restrained by a weak credit growth impulse, moderating GST collection pace and tight financial conditions. Wealth effects from healthy equity markets will also be tempered given the sharp correction in the benchmark indices in the past 3-4 months. Our FY25 growth stands at 6.5%.
What are your growth estimates for FY26, and what are the drivers? Do you foresee a major impact from tariffs on the economy in the next financial year?
Amidst signs of a cyclical slowdown, we note a coordinated effort to make conditions more conducive, including the 25bp rate cut, a favourable liquidity response, postponement of the new liquidity coverage ratio norms as well as a delay in proposed regulations on project financing. Lower risk weights will support capital adequacy levels, freeing up space for banks to lend onward, most likely to better-rated non-bank institutions (improve funding access and lower borrowing costs for the latter) once policy transmission improves.
The global macro environment is, however, less conducive as tariff action and retaliation will dampen trade activity and hinder capex commitments. Attention will thereby be on spurring domestic activity via stronger support from public spending, better farm output, resilience in manufacturing and construction activity and improvement in external trade balances on better service sector receipts. The near-term impact of tariffs on growth might be small, with asymmetric sectoral implications, focused on pharma, auto and electronic segments.
Do you see slow down in global growth for the current calendar year?
Our view on global growth is cautious, marked by a about 2% growth in US, and about 1% in Europe as well as Japan. In the US, beyond tariffs, immigration tightening measures, along with consolidation of public sector payrolls and spending would be growth negative, offsetting supportive measures like deregulation and tax cuts, in our view. Already consumer and business confidence markers are showing deterioration, understandable given the heightened noise around decision-making. For Europe, the latest constructive news out of Germany on an increase in public spending bodes well for its outlook, after tepid performance in the past two years.
Do you see any possibility of the Federal Reserve implementing more than two rate cuts, considering the impact of tariffs on the US economy?
US inflation has already been stalling long before settling at the Fed’s target of 2%. With tariffs and tax cuts in play, we see headline and core inflation more in the 2.5-3% range the next two years. Inflation expectation have begun rising, as per consumer surveys and market-based indicators. Unless there are major financial stability related concerns and a sharp downshift in economic growth momentum, the Fed would find it hard to carry out substantial accommodation; we see 4% as the terminal rate in this cycle, putting aside the scenario of Trump finding ways to force the Fed into cutting rates. Unlike Trump 1.0 when tariff announcements involved a considerable lag of more than a year, this time the incoming government has been swift in acting.
Will the RBI announce more measures to manage liquidity conditions?
In continuation with measures to ease banking system liquidity, the RBI announced two more tranches of open market operations (OMOs), and another foreign currency swap to be conducted this month. Under the OMOs, bond purchases worth Rs 1 lakh crore will be carried out in two parts – March 12 and 18, followed up by buy/sell USD/INR currency swap auction worth $10 billion for 36months on March 24. The liquidity balance had been in deficit since December 2024, registering the widest gulf in January, and thereafter moderated to below Rs 2 lakh crore last month, and further to Rs 30,000 crore this week.
A strong move to boost liquidity – latest measures are expected to lift core liquidity to a surplus – suggest that the overall policy stance is clearly accommodative, with an eye on facilitating policy transmission. These steps are pre-emptive ahead of a seasonal squeeze in March, being a fiscal year end, besides other contributing factors including FX market intervention, tax outflows, volatility in capital flows and currency in circulation. At a more structural level, the move for the centre to disburse funds to states and other agencies at the time of need rather than in advance has also added to the tightness.
Concerted action, which includes tranches of OMOs, VRR auctions and FX swaps besides a CRR reduction in December, have added more than Rs 4.0 lakh crore to the domestic banking system yet far. Looking ahead, a strong dividend transfer from the RBI in May will also provide a more durable liquidity injection, keeping the overall balance well in surplus. The FY26 Budget had projected Rs 2.56 lakh crore in dividend income from the central banks and public sector institutions.
Do you strongly expect the RBI to implement only another 25 bps cut in the repo rate for the rest of 2025?
With FY26 growth to stay likely to downshift to the 6% handle this year from a revised 9% pace in FY24, food disinflation setting in and successive measures to loosen macroprudential restrictions, policymakers have the room to maintain a dovish tilt. We expect a rate cut in April, with a likely shift in the stance to accommodative.
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