RBI unlikely to go for immediate rate cut, despite inflation likely to cool: Ind-Ra
India's Economic Outlook for FY25
India Ratings and Research (Ind-Ra) has provided a cautious outlook for the fiscal year 2025, predicting a decline in inflation but indicating that immediate interest rate cuts by the Reserve Bank of India (RBI) are unlikely. The ongoing high food prices are a significant factor in inflation, and any potential rate cuts will depend on stable inflation trends approaching the RBI's 4% target.
Economic Challenges and Opportunities
Despite inflation and weak industrial activity, there are positive signs in rural demand, driven by improved real wages for rural laborers and above-normal rainfall. These factors are expected to boost consumption demand. Devendra Kumar Pant, Chief Economist at Ind-Ra, highlighted the slow growth of net taxes and sticky inflation as major challenges for the Indian economy in FY25.
Impact of Global Factors
Global economic actions, such as the US Federal Reserve's interest rate cuts and China's economic stimulus, provide some relief, though tensions in West Asia could add uncertainty. Despite recent volatility, India's economy has shown resilience, achieving an average GDP growth above 7% eleven times on a three-year average basis since FY16.
Manufacturing and Trade
Manufacturing growth has been sluggish, with a rate of just 3.6% for the first five months of FY25. Uneven income growth has dampened consumer demand for certain goods, but positive wage growth is expected to narrow this gap. A decrease in global demand has weakened India's goods exports, leading to a widening trade deficit, though strong services exports and remittances are expected to keep the current account deficit manageable.
Currency and Economic Resilience
Ind-Ra projects a current account deficit of 1.0% of GDP for FY25, with improved capital inflows and India's inclusion in global bond indices likely to increase forex reserves. The rupee is expected to average 84.08/USD in FY25, depreciating at a slower rate than in recent years. Overall, while challenges to sustaining high GDP growth exist, India's economic fundamentals and resilience provide a foundation for potential recovery.
Doubts Revealed
FY25
FY25 stands for Fiscal Year 2025. In India, a fiscal year is a period used for accounting and budget purposes, which starts on April 1st and ends on March 31st of the next year.
Inflation
Inflation is when the prices of goods and services go up over time. It means that you need more money to buy the same things you used to buy for less money.
Interest Rates
Interest rates are the cost of borrowing money or the reward for saving money. When interest rates are high, borrowing money becomes more expensive, and saving money becomes more rewarding.
RBI
RBI stands for the Reserve Bank of India. It is the central bank of India, which controls the money supply and interest rates in the country.
Rural Demand
Rural demand refers to the need or desire for goods and services in the countryside or villages. It can increase when people in rural areas have more money to spend.
Trade Deficit
A trade deficit happens when a country buys more goods and services from other countries than it sells to them. It means more money is going out of the country than coming in from trade.
Current Account Deficit
A current account deficit occurs when a country spends more on foreign trade than it earns. It includes trade in goods and services, as well as money transfers.
GDP
GDP stands for Gross Domestic Product. It is the total value of all goods and services produced in a country in a year. It helps to measure the economic health of a country.
Depreciate
When a currency depreciates, it means it loses value compared to other currencies. For example, if the rupee depreciates, you need more rupees to buy the same amount of dollars.
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