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Executive Summary

FY24 sees sizzling growth in India boosted by government capex: fervent manufacturing and services activity signals a strong start to FY25

FY24 recorded an impressive 8.2% y/y real growth, propelled by government capex & manufacturing rebound, adorned by a notably low GDP deflator. High frequency indicators showed continued momentum in 2MFY25, especially in energy goods. We expect a real growth of 7% y/y for FY25, a tad lower than the RBI

Economic expansion has not come at the cost of fiscal expansion: bulky tax revenues, balanced revex, and RBI’s bumper dividend to limit India’s fiscal deficit

The fiscal deficit came at 5.6% of GDP as per FY24P, outperforming FY24RE of 5.8%. There was a sharp growth in net tax revenues, with the government keeping overall expenditure in check, raising the quality instead. We project continued tempering of fiscal deficit, with sufficient cushion provided by RBI dividend

Food inflation to remain volatile in India even as a cooling Core keeps the headline in check for now

Headline inflation averaged 5.4% y/y in FY24, cooling significantly from FY22 highs, largely due to consistently ebbing Core. Stable Core, favorable base effects in food and fuel, bountiful monsoons, and moderating crude prices support our outlook of headline averaging 4.7% in FY25. Risks to this outlook include volatility in TOP prices due to lower-than-expected production and potential increases in protein prices

The world is taking note of these achievements as S&P has upped its outlook on India’s sovereign rating to “Positive” from “Stable”

This was done sensing a structural shift in growth and spending patterns, with a rating upgrade possible in 2 years subject to fiscal prudence and effective monetary policy keeping inflation down durably. Rating agencies also chose to retain their rosy predictions amidst possible shifts in the fiscal compass

RBI delivers a status quo policy but says more than nothing: hints at policy discourse evolution through voting patterns and decoupling from the US Fed

Maintaining its focus on financial stability through counter-cyclical buffers, the changed voting pattern (4-2 vs. 5-1 last time) indicated a change in the making. The Governor’s insistence on the RBI not necessarily going the way of the US Fed also indicated a possible delinking on policy trajectories

Challenges of last mile-disinflation may hinder early policy rate cut by US FED

US real GDP grew 1.3% q/q saar in Q1CY24, missing expectations, while PCE prices rose 2.7% y/y. Better non-farm payroll data has tempered market expectations of rate cuts to 1-2 cut in CY24, with probability of Sep’24 cut dwindling down

10-year Indian G-Sec’s descent may face bouts of volatility, but remains unhindered, led by strong fundamentals

The continued glide path of fiscal consolidation, anticipated global monetary easing, bond-inclusion flows starting this month, cooling inflation, and expected rate cuts in late CY24 or early CY25, ensure a descent of 10-year yields to 7% over the medium term

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