Resilience Amidst Global Uncertainty
Goldman Sachs has projected India's GDP growth to decelerate to 6.3% year-on-year in 2025. Despite this slowdown, the report highlights India's relative insulation from global economic shocks, particularly a potential trade war between the US and China.
The slowdown is attributed to continued fiscal consolidation and tighter credit growth due to macro-prudential measures implemented by the Reserve Bank of India (RBI). The RBI's monetary policy is expected to remain cautious in 2025, balancing the need for easier monetary conditions with the strong US dollar scenario and global trade uncertainties.
Despite calls for more accommodative monetary conditions, the RBI is likely to proceed carefully. Retail loan growth may remain subdued even with lower interest rates due to ongoing macro-prudential tightening. Inflation is projected to align with the RBI's target next year, but the rate-cut cycle is expected to be limited. The RBI is likely to aim for a balanced approach, keeping monetary policy close to the nominal neutral rate, estimated at 6%.
Goldman Sachs suggests a 25-basis-point repo rate cut in February 2025, followed by another 25-basis-point cut in April. The RBI is also expected to maintain a liquidity surplus, allowing overnight inter-bank rates to fall to 5.75%, effectively delivering a 75-basis-point easing from the current levels of 6.50%.
India's economy is anticipated to maintain stability amid global trade tensions, showcasing its resilience in the face of external shocks. Goldman Sachs projects headline inflation to average 4.2% YoY in 2025, down from over 7% in 2024. Food inflation is expected to fall to 4.6%, supported by better rainfall and improved summer crop sowing, which could lead to a more robust harvest.
"Core inflation has made steady progress lower from 5.0 percent YoY (average) in CY23 to 3.5 percent YoY in CY24. We forecast a continued decline in headline inflation towards the RBI’s target of 4 percent in CY25 as we expect nearly 2.5 percentage points lower food inflation next year — adequate rainfall and good sowing of the summer crop point toward a better broad-based crop harvest,” Goldman Sachs said.