S&P Global Ratings, a major credit rating agency, anticipates that the Reserve Bank of India (RBI) might reduce interest rates in the fiscal year 2024-25, contingent on the containment of food inflation and the performance of the monsoon.
India’s Strong Economic Growth Amid Fiscal Challenges
- Despite the potential interest rate cut, S&P Global Ratings remains optimistic about India’s economic growth, forecasting a 6% GDP growth in the current year and 6.9% over the next two years. This growth outpaces many of its BBB- to A-rated peers in the Asia-Pacific region. However, higher interest rates pose a fiscal challenge.
High Bond Yields and Debt Funding Pressures
- India’s government bond yields have historically been higher than those of its peers, putting additional pressure on the cost of servicing the country’s substantial debt. This financial dynamic is crucial for understanding India’s debt trajectory in the coming years.
Monetary Policy as a Key Theme in 2024
- S&P Global’s senior economist, Vishrut Rana, underscores the significance of monetary policy in India’s economic landscape in 2024. This emphasis is particularly relevant in light of the “higher for longer” interest rates observed in the United States.
Controlled Inflation Opens the Door for Interest Rate Cuts
- S&P Global Ratings believes that India is likely to experience controlled headline inflation in the coming months. This favorable condition provides room for the RBI to consider a normalization of monetary policy, which includes potential interest rate cuts. However, the central bank will closely monitor financial stability, exchange rates, and capital flows amid global economic conditions.
The Critical Role of Food Inflation
- S&P Global Ratings highlights that food inflation remains a pivotal factor for India’s economic trajectory. A normal monsoon season is essential for sustained food price stability, and as long as this condition is met, interest rates are expected to decrease.
Free Food Grain Scheme Extension and Fiscal Health
Concerns about the extended free food grain scheme and the possibility of additional government initiatives, especially in the run-up to general elections, may raise concerns about India’s fiscal health. However, Andrew Wood, the rating firm’s sovereign ratings director, suggests that these initiatives are unlikely to have a significant impact on India’s medium-term finances.
Wood asserts that the government is likely to adhere closely to its fiscal deficit targets and glide path through fiscal year 2026, even with the extended food scheme. This is possible due to budget adjustments and calibrations throughout the year and the gradual nature of the fiscal consolidation targets. Additionally, strong revenue growth is expected to persist in the coming years.