RBI rate cut unlikely before Oct-Dec 2024: Barclays’ Bajoria

Some of the biggest economies in the world, including India and United States, are headed for polls this year, and that could be the biggest source of economic headwinds going ahead, said Rahul Bajoria, managing director and head of emerging markets Asia economics (excluding China), at Barclays. Speaking to DH’s Arup Roychoudhury, he added that India’s growth fundamentals are expected to continue with a lot of infrastructure projects in the pipeline. He also called for laying down a medium-term path of fiscal priorities in the upcoming interim budget. Edited excerpts.

What are your expectations for the current financial year (2023-24) and the next (2024-25)?

For the current financial year, we have upgraded our GDP growth forecast, from around 6.3 per cent to about 6.7 per cent. I would say, we, like everyone else, expect a bit of a sequential slowdown in the second half of the fiscal year. But generally speaking, the data that has come through for the third quarter of the fiscal year has been fairly robust. There were some signs of weakness in November and December, but it might still end up being closer to RBI’s projections of 7 per cent. I think the consensus is that growth has turned out to be much stronger than what was expected at the beginning of the year.

For FY25, there are obviously concerns around the state of the global economy, and its impact on demand conditions in India. If we look at the United States, Europe, and China - everywhere growth is expected to weaken, even if there is monetary policy support. So, I think the global backdrop is a bit challenging from a growth standpoint, countered to a certain extent by the decline in commodity prices.

I think for India itself, the domestic growth, whether it is consumption or investment, appears to be fairly organic, and it can become a bit more self-sustaining. We will be adding significant capacity in sectors like airports, railways, power, logistics and others. Our growth differential with the rest of the world remains very high. Now the drag of a weaker global backdrop may take us down at the margins more than at the headline level. But I am more focused on the growth differential rather than the level of growth itself. Our GDP growth projection for FY25 is 6.5 per cent.

Can you give some examples of global economic headwinds expected, going ahead?

The biggest source of uncertainty still remains the geopolitical scenario. Almost more than half of humanity is going for elections in 2024, starting with Taiwan and culminating with US elections in November. This comes in the backdrop of two simultaneous wars – one in the Middle East and one in Eastern Europe. So even if the situation appears relatively benign from India’s context, things can be very uncertain. These things can turn on their head within a matter of days.

How do you see liquidity and interest rates, going ahead?

In the case of the major central banks like the Federal Reserve or the European Central Bank, the path towards monetary easing is becoming a lot clearer than what it was perhaps three four months ago. There are clear signs of disinflation and growth slowdown. So we expect that from April-June quarter onwards, central banks in both the US and Europe are going to start easing monetary policy.

For the Reserve Bank of India, it's a very interesting situation, because, as I said, our growth differentials to the rest of the world are quite high. We are growing faster, and are seeing a decline in energy prices, which is obviously good from an inflation management perspective. But then core inflation has also been declining, which means that there is slack in the economy, even with the current growth rates.

With global monetary policy conditions becoming a tad easier, I think the policy focus will shift away from macro stability towards what is the right level of real interest rates India should be running. Right now we have a forecast for a rate cut in December or at least in the last quarter of the calendar year. If commodity prices remain reasonably benign, there is a chance that it may happen earlier rather than later.

The upcoming budget will be an interim one. What are your expectations?

Given that this will be an interim budget and we will have a more comprehensive exercise in July, I think this particular budget can try and set certain longer term goals. It can be a mission statement for the fiscal priorities over the next three to five years, whether it is rationalising and further streamlining the direct tax code or a possible simplification of GST, etc. So, I would look for such messages rather than anything particularly concrete. The medium-term challenge is to build fiscal space for the next big crisis. So I'd be most keen to see if the finance minister is laying out a path for fiscal consolidation not just in the next year, but over a medium term, and give a sense of how we get back to lower debt/GDP levels.

Since before the Covid-19 pandemic, the centre and states have been carrying a bulk of infrastructure investment. Is that feasible in the longer run, as the private sector has some reason or the other to hold back investment?

There are imminent signs that private capex is picking up. Government capex has done a fair bit of heavy lifting in the last few years, but there are limitations to it. So while the centre’s capex target for FY25 may increase, the rate at which they are going in the last three years, it may not be maintained. The expectation would be that while private capex continues to show improvement, the government would continue to invest in infrastructure.