India’s economy is poised for strong growth in 2024, with Moody’s Ratings forecasting a 7.2 per cent GDP increase. The agency highlighted that the country is in a “sweet spot” due to solid economic fundamentals, but inflationary pressures may compel the Reserve Bank of India (RBI) to maintain a cautious monetary policy stance.
Inflation Dynamics and RBI’s Tight Policy
Moody’s noted that while retail inflation recently surged to a 14-month high of 6.21 per cent, surpassing the RBI’s upper tolerance limit, this trend is expected to moderate in the coming months. Factors such as increased food grain sowing and sufficient buffer stocks are likely to ease food prices, providing some relief.
However, the agency warned that sporadic food price pressures and risks from geopolitical tensions and extreme weather events could disrupt the disinflation trajectory. Despite the RBI shifting its stance to neutral and holding the repo rate steady at 6.5 per cent in October, it is unlikely to lower interest rates soon.
“The central bank will likely retain relatively tight monetary policy settings into next year, given healthy growth dynamics and inflation risks,” Moody’s stated. The RBI’s monetary policy committee is set to meet next month, but analysts believe that high inflation will deter any rate cuts.
Growth Drivers
India’s robust economic performance in 2024 has been underpinned by several key factors:
- Household Consumption: Increased spending during the festive season and a steady revival in rural demand are expected to fuel household consumption growth.
- Private Investment: Rising capacity utilisation, positive business sentiment, and the government’s continued focus on infrastructure projects are likely to bolster private investment.
- Manufacturing Activity: Strong manufacturing growth has significantly contributed to the economic revival, driving India’s real GDP to expand by 6.7 per cent year-over-year in the second quarter of 2024.
Moody’s reported that the July-September quarter also exhibited steady economic momentum, indicating sustained growth ahead.
Long-Term Outlook
From a macroeconomic perspective, Moody’s forecasts 7.2 per cent growth for 2024, followed by 6.6 per cent in 2025 and 6.5 per cent in 2026. The agency attributes this positive outlook to India’s sound economic fundamentals, including:
- Healthy Corporate and Bank Balance Sheets: These ensure financial stability and support sustained investments.
- Stronger External Position: A stable external account strengthens India’s ability to weather global shocks.
- Ample Foreign Exchange Reserves: These reserves act as a buffer against external vulnerabilities.
Moody’s also highlighted the global economy’s resilience in recovering from challenges such as the pandemic, the energy crisis triggered by the Russia-Ukraine conflict, and high inflation.
Global Risks and Trade Tensions
On a global scale, Moody’s identified trade tensions and geopolitical stresses as significant risks to economic stability. The ongoing friction between the United States and China, coupled with increasing trade protectionism, could lead to long-term geoeconomic fragmentation.
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“Post-election changes in US domestic and international policies could accelerate global economic fragmentation, complicating ongoing stabilisation,” said Madhavi Bokil, Senior Vice President at Moody’s Ratings.
The agency warned that a shift toward strengthening domestic industries in major economies might reduce the reliability of external demand as a growth driver. For countries like India, which possess robust domestic growth engines, this could translate to greater resilience in the face of global uncertainties.
Implications for India
Moody’s optimistic outlook for India underscores its position as a bright spot in the global economy. With a combination of healthy growth, moderating inflation, and strong economic fundamentals, the country is well-positioned to navigate both domestic and international challenges.
However, the forecast also highlights the need for prudent monetary policies to balance growth with inflation control. The RBI’s cautious approach, alongside continued government support for infrastructure and rural development, will be critical in sustaining India’s economic momentum in the coming years.
As global dynamics evolve, India’s ability to leverage its domestic demand and navigate trade and geopolitical risks will determine its long-term economic trajectory. For now, Moody’s analysis suggests that India remains a beacon of economic resilience and growth potential in an increasingly complex global landscape.
