Ahead of first MPC review of FY25, SBI Capital Markets expects no rate cut before August

SBI Capital Markets (SBI Caps) expects the first reduction in the country’s benchmark interest rates only after August. In the April edition of its 'Ecocapsule' report, SBI Caps—a wholly-owned subsidiary and the investment banking arm of SBI—pegged domestic consumer inflation to average 4.7 per cent in FY25 with evenly balanced risks. 

The SBI Caps report comes as the country awaits the outcome of the RBI governor-led Monetary Policy Committee’s first bi-monthly review of the current financial year. In its last review of FY24, the all-powerful panel voted 5:1 to leave the repo rate, the key interest rate at which the RBI lends money to commercial banks, unchanged at 6.5 per cent. 

“Several MPC members have indicated that weighted average call rate needs to align with the repo rate, as the RBI’s operating mandate hovers way higher near the MSF rates,” SBI Caps mentioned in its report. 

Meanwhile, the Fed left the benchmark US interest rate unchanged last month, with its dot plot still suggesting three rate cuts in 2024. 

Where does SBI Caps peg India’s GDP growth?

The investment bank estimates India’s real GDP growth at 6.5 per cent in the current financial year, citing better-than-expected macroeconomic data amid a continuous upgrade of estimates. SBI Caps also mentioned a substantial gap between GDP and GVA which can be attributed to robust growth in net taxes (indirect tax minus subsidy).

The projection follows official data released in February that showed the country’s GDP growth stood at 8.4 per cent in the October-December period, boosted by double-digit expansion in the manufacturing sector and much higher than economists’ average expectation of 6.6 per cent. Read more on India’s Q3 GDP data

Noting that the manufacturing fervour in the economy accompanies services’ exuberance, SBI Capital said that a positive surprise in manufacturing in the December quarter GVA likely continued in the following three months amid a visible buoyancy in indicators. 

“The manufacturing PMI showed its highest reading in 16 years on the back of expansion in new orders due to demand pick-up and steep rise in investment goods… The Eight Core index showed impressive growth in 11MFY24 (7.7 per cent on a year-on-year basis), with activity strongest in electricity and infra-forward sectors,” it said.

Industrial production growth picked up in the first 10 months of the financial year 2023-24 driven by infrastructure and capital goods while non-core sectors lagged slightly, it  noted. 
A pickup led by infra and capital goods serctors could be seen soon as their financials have improved soundly, according to SBI Caps. 

The investment bank also pointed out that the services activity in the country is strong, with an uptick in momentum with healthy demand conditions and efficiency gains driven by financial services industries.

Here are some other highlights of the April edition of the SBI Caps report: 

• PV sales increased 10 per cent in the April-February period of FY24 with buoyancy in two- and three-wheeler sales 
• Power consumption grew 1.4 per cent to 129.9 billion units in March as pleasant weather across the country warranted lower use of heating equipment
• India remained a net importer of steel in the April-February period despite exports surging in February
• Steel demand likely to improve in 2024 compared to the world
• UPI transactions value saw a huge upsurge, and growth remained above 40 per cent in every month of FY24

It expects the country’s fiscal deficit, or a shortfall in a government’s income compared to its expenditure, to stand at 8.2 per cent of its GDP in FY24. 

The investment bank expects the benchmark 10-year government bond yield to fall below 7 per cent in the coming months, according to the report. 
It mentioned the following key risks to its assumptions: 

Yield softening triggers

• Inclusion in global bond indices
• Liquidity surplus
• Softening in commodity prices due to global slowdown

Yield hardening triggers

• Higher CPI print than estimate
• Higher crude price- impact on fiscal, inflation
• Higher government borrowing
• Currency volatility