Indian GDP surprising positively despite headwinds: Axis Bank

Axis Bank today said it expects upgrades to India’s GDP forecasts and an upward reset in trend growth assumptions on the back of positive surprises. The bank, in its India Economics Outlook 2024, also cautioned that the global headwinds are likely to intensify, decelerating economic growth in 2024-25.

“India’s GDP growth is surprising positively despite several headwinds: fiscal consolidation, higher domestic interest rates, tightening liquidity conditions, and slowing exports of goods and services. We expect further 70/20bps upgrade to FY24/25 consensus forecasts,” said the report.

“We worry that the US’s growth is supported by unsustainable fiscal support and is likely to disappoint with intensifying global headwinds, keeping us conservative on FY25 growth at 6.5%.We also expect trend-growth estimates for India to get revised to 7%+,” said the report.

On inflation, the Axis Bank report said moderation in core inflation should persist, as GDP is still below the pre-pandemic path, but volatile food inflation is likely to keep headline above the mid-point of the target range. “We expect the slow moderation in core inflation to persist, as the GDP gap vs the pre-pandemic path is narrowing. The moderation in services inflation, reflecting slack in the labor force, is evidence of this trend,” it added.

The report pointed out that the food inflation could throw a challenge to the monetary policy action. “The policy challenge though would come from volatility in food inflation, keeping inflation above the mid-point of the target for most of next year. Tight liquidity conditions, equivalent to a 25-30 bps rate hike, can ease once global risks fade. If the government sticks to 4.5% fiscal deficit in FY26, bond yields could ease too,” it added.

“High-frequency demand trends for services in terms of credit growth, construction activity, trade travel and transportation, and others have been better-than-expected in the past few quarters,” the report said.