Goldman Sachs revises India’s GDP forecast upwards on RBI dividend bonanza

Goldman Sachs expects investment growth momentum to sustain.

The US-based Goldman Sachs has revised its GDP forecast for India by 10 basis points to 6.7 percent expecting a sustained growth momentum with additional fiscal space on account of a bumper dividend transfer from the central bank.

The global financial institution also expects the Reserve Bank of India to go for a rate cut in the October-December quarter as it forecast an uptick in core goods inflation due to a rise in manufacturing costs.

“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 forecasts for 2024 slightly higher by 10 bps to 6.7 percent,” Andrew Tilton, head of emerging markets economic research at Goldman Sachs said in a note co-authored with Santanu Sengupta and Arjun Varma.

“In India, growth momentum remains strong, and while we think core inflation will bottom out in April-June, we expect it to be around 4.0 - 4.5 percent in July-December,” Goldman Sachs said.

However, MPC members from the RBI have recently sounded cautious on sticky food inflation and may want to see monsoons progress and the summer crop sowing to assess the food inflation outlook in July-December, before pivoting towards monetary policy easing, the report said.

“Taking into account these developments, we push our RBI rate cut call back by one quarter to October-December, with the first cut most likely in the December 2024 meeting. We continue to expect a shallow easing cycle of total 50 basis points (bps) rate cuts from the RBI, with 25 bps rate cuts each in October-December and January-March 2025,” it said.

US Federal Reserve

Goldman Sachs also expects two rate cuts by the US Federal Reserve, in September and December this year.

Our US economics team pushed back its forecast for the Fed’s first rate cut by one meeting to September (from July previously) but still expect two rate cuts in 2024, with the second cut in December, it said.

RBI forecast
Durable alignment of the inflation with a target of 4 percent may happen in the second half of the year, RBI’s latest monthly bulletin said on May 21. It further said that statistical base effects may help pull down the headline inflation in July and August, it is expected that September may see a reversal.

The monthly State of the Economy article includes Deputy Governor Michael Patra - one of the three RBI representatives on the Monetary Policy Committee (MPC) - as one of its co-authors. The views expressed in the article do not reflect the central bank's official stance.

The central bank has an inflation target of 4 percent, with a leeway of two percentage points on either side.

The bulletin said Food inflation (y-o-y) edged up to 7.9 percent in April from 7.7 percent in March. In terms of subgroups, inflation firmed up in cereals, meat and fish and fruits while eggs, milk, vegetables, pulses, sugar, spices, non-alcoholic beverages and prepared meals registered a moderation in inflation.