Policy rates unlikely to fall in CY24 says Axis Bank’s Neelkanth Mishra

Presenting the forecast for CY2024, Neelkanth Mishra, Chief Economist, Axis Bank said that the policy rates are unlikely to fall in CY24. While this stance is slightly contrarian to the broader market consensus, Mishra expects the headline CPI (consumer price index) inflation to remain volatile and above the mid-point of the target for the coming year.

“This is despite the core inflation drifting marginally lower from the current moderate levels which are already below pre-pandemic levels,” he notes in India Economics, Outlook 2024 report.

“Food inflation is likely to remain volatile, with new supply shocks, compounded by the rising incidence of erratic monsoons, cyclonic disruptions and hailstorms. Despite export restrictions on wheat and rice, rising global prices have affected local prices. Such shocks increase the risk of entrenching inflation expectations”.

However, on aspects of macroeconomics and overall corporate health, Mishra believes that the coming year holds a lot of promise.

GDP growth

Guiding for 6.5 per cent GDP growth in FY25 (7 per cent in FY24), Mishra is of the view that one should expect a further 70 basis points (bps) and 20 bps upgrade to FY24 and FY25 consensus GDP forecasts respectively, making India’s growth revisions second only to the US. “India’s GDP growth is surprisingly positive despite several headwinds: fiscal consolidation, higher domestic interest rates, tightening liquidity conditions and slowing exports of goods and services”.

He’s also making a case for an upward revision in the GDP trend growth estimates, drawing confidence from a pick up in capacity utilisation, an improvement in the real estate cycle and power consumption, where he believes in March 2024, India may once again see a shortage in power supply as witnessed earlier this year. Sounding bullish on the corporate capex, Mishra opines that the capex cycle is turning around after several years of deleveraging and cleaning up of bad loans. “This cyclical recovery can support 4 per cent plus growth in capital formation, driving 7 per cent plus growth in GDP over the next few years,” he adds.

Recession in the US

Interestingly, he also notes that while the US has successfully held back from entering the recession mode in 2023, he explains that the event may have best been delayed not avoided. “Strength in the US has been supported by an unexpected sharp expansion in the fiscal deficit – for the fiscal year ended 30-Sep-2023, the deficit rose to $2 trillion (adjusted for the student debt relief program cancellation by the Supreme Court) versus $1 trillion in FY22 and similar amount budgeted initially. This has supported growth so far and in our view, as the fiscal deficit stabilises at this high level, implying no further stimulus, tightening monetary conditions are likely to trigger a recession”. If this plays out, Mishra foresees a reduction in the availability of US dollars and consequently, capital flows may fall to 1-1.5 per cent of GDP (including 0.6 per cent of GDP of inflows from bond index inclusion), as the US government and the US economy absorb the shrinking quantity of dollars available globally.

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