Another pressing concern is the repo rate. With the U.S. Federal Reserve cutting rates, all eyes are on the Reserve Bank of India (RBI) and its upcoming Monetary Policy Committee (MPC) meeting. Will the RBI finally cut rates after maintaining status quo for an extended period?
A recent UBS report highlights five critical questions that shed light on India’s economic trajectory and stability in the coming years.
K-shaped consumption pattern
One of the prominent insights from the UBS report revolves around the K-shaped consumption pattern observed in India. The consumption behavior, where the affluent segment (people with annual gross income of over US$10,000) has been outperforming while lower-income groups lag behind, is expected to narrow in FY25.
According to UBS, signs of fatigue are emerging in the premium consumption segment, while rural and low-income segments may see a cyclical recovery. Factors like public capex, increased social welfare spending, and state government elections are likely to boost demand in these segments.
Peak growth or potential decline?
India has enjoyed a ‘goldilocks’ phase since FY22, marked by strong growth and manageable macroeconomic risks. However, UBS warns that external factors such as a global slowdown, especially in China, could pose challenges. While India’s GDP growth is expected to stabilize at 6.8 per cent in FY25, risks remain skewed to the downside, particularly with global economic uncertainties and China’s excess capacity potentially impacting the domestic market. “Among emerging markets, we continue to expect India to remain one of the fastest growing major economies in 2024-26E. However, we think India is not immune to external risks including a global growth slowdown and China’s excess capacity being offloaded on the domestic market,” UBS said.
Shifting household savings
The report also highlights a significant shift in household savings patterns. Since the pandemic, many households have moved away from traditional bank deposits in search of higher returns through investments in property, equities, and small savings schemes.
This shift has caused bank credit growth (15 per cent YoY as of August 2024) to outpace deposit growth, raising concerns about the sustainability of the current financial dynamics. “While UBS’s India Bank team expects bank credit growth to soften to 12-13% YoY by end-March 2025E, we think bank deposit rates could stay elevated despite expected policy easing, leading to asymmetric monetary transmission.”
Rate Cuts: Will the RBI act sooner?
As inflation begins to moderate, real interest rates are rising, sparking questions about the potential impact on India’s capex recovery. UBS now forecasts that the RBI could lower repo rates by 75 basis points in this cycle, with rate cuts possibly starting as early as December 2024.
” That said, the timing of India’s rate cut cycle will be dependent on domestic growth-inflation dynamics. In our base case, we expect an easing cycle to start from December policy,” UBS said.
Also Read: RBI expected to start rate cut cycle from December this year
Fiscal profligacy in Indian States
The final point of concern highlighted by UBS is the fiscal profligacy observed in several Indian states, particularly those heading toward elections. The report notes that states have promised increased welfare spending and stimulus, which could drive fiscal deficits higher. UBS estimates the states’ fiscal deficit will rise by 20 basis points in FY25, potentially affecting the overall capex spending and economic stability.