- Banking
- Wealth
- Privileges
- NRI Banking
- Treasures Private Client
- We expect a reset in growth drivers this year.
- To offset external risks, policy support is being extended.
- Authorities will be cautious on two counts.
- Delay in green shoots is likely to trigger rate cuts.
- Bond action is being driven by short-term triggers.
Related Insights
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A reset is likely
We expect a reset in growth drivers this year. Gross capital formation has outpaced consumption growth since emerging from the pandemic (see chart), following an extended period of deleveraging among key economic actors over the prior decade. For the coming year, consumption growth should outpace investment growth. To offset external risks, policy support is being extended which is expected to be demand-accretive, even if part of the impact is likely to be felt most this year (e.g., buffer on account of tax relief). Public spending is likely to be jump-started, besides modest growth in household investments, while the private corporate sector is likely to await clarity on domestic and global developments. Growth above 6% will be among the strongest in the region, accompanied by sub-4% inflation and favourable external balances, including a current account deficit of below 1% of GDP.
Jan-Mar25 GDP growth received a one-off lift
Real GDP growth posted a strong 7.4% yoy in 1Q25 (4QFY25), exceeding. our forecast of 7% and the consensus of 6.8%. This marked an increase from an upwardly revised 6.4% quarter before and took FY25 average to 6.5%, in line with our projection. As we noted in Growth and monsoon watch, the headline real GDP received an one-off boost from net indirect taxes (a sharp fall in subsidy payments) which widened the wedge between the GDP and GVA gauges. The supply measure GVA which rose 6.8% in 3QFY from 3QFY’s 6.5% provided a better handle on the underlying growth impulse.
Near-term growth impulse
We highlight our proxies for consumption, investment and trade. Our proxy for consumption has yet to show a discernible improvement in demand in both rural and urban areas into 1FY26. Our gauge for investment growth signals choppy momentum, improving late last year as government capex resumed after a poll-led slowdown. The net goods and services trade deficit widened in Apr-May25. Our GDP Nowcast model estimates growth to moderate mostly by declines in industrial production and commercial vehicle sales. We revise full-year growth of 6.3% in FY26, vs 6.5% in FY25.
Market implications
For markets, the RBI monetary policy committee (MPC) banked on soft inflation to frontload policy easing measures, while growth is expected to ease below 7% this year. Easing food costs and benign core-core inflation (core ex precious metals) are likely to keep 1QFY26 (2Q) inflation below 3%, prompting us to revise down our full-year FY26 forecast to 3.5% from 3.8% earlier, below the central bank’s target. Besides the other salutary motives, liquidity infusion via the CRR cut would also aid this process and ensure it is non-disruptive, while shielding the currency. With our forecast of 5.5% terminal rate met, further rate reductions are likely if the growth momentum weakens anew. The forward looking real-rate buffer is set to narrow, i.e. RBI’s Mar26 inflation projection is at 4.4% vs repo rate at 5.5% (~100bp buffer) vs the prevailing ~270bp.
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