India’s Q2 indicators signal steady momentum: Moody’s Ratings

The firm’s latest global macro outlook flags sporadic food price pressures that are adding volatility to disinflation path, expects the RBI to “retain relatively tight monetary policy settings into next year” thanks to healthy growth dynamics and inflation risks

The agency has forecast a 7.2% growth for India in the calendar year 2024, followed by 6.6% in 2025 and 6.5% in 2026. | Photo Credit: Reuters

Amid concerns about some slackening of the growth momentum with weakening urban demand and underwhelming corporate results in the July to September quarter or Q2, Moody’s Ratings on Friday (November 15, 2024) took a sanguine stance on India’s growth prospects for the quarter citing “steady economic momentum” and asserted that household consumption is “poised to grow”.

The global rating major’s assessment assumes significance coming ahead of the official Q2 GDP growth estimates that are scheduled to be released at the end of November.

A recent article by Reserve Bank of India (RBI) officials in its October bulletin, had projected Q2 GDP growth at 6.8%, marginally higher than the 6.7% rise in Q1 of 2024-25, based on an economic activity index. However, some economists are not as confident. State Bank of India’s economic research team has pegged Q2 GDP growth at 6.5%, for instance.

“India’s economy is growing robustly and has the potential to sustain high growth rates as strong private sector financial health reinforces a virtuous economic cycle,” Moody’s Ratings said in its global macro outlook for 2025-26, noting that Q1 growth was driven by a revival in household consumption, robust investment and strong manufacturing activity.

“High-frequency indicators – including expanding manufacturing and services PMIs, robust credit growth and consumer optimism – signal steady economic momentum in Q3. Indeed, from a macroeconomic perspective, the Indian economy is in a sweet spot, with the mix of solid growth and moderating inflation,” it reckoned.

The agency has forecast a 7.2% growth for India in the calendar year 2024, followed by 6.6% in 2025 and 6.5% in 2026.

On inflation and interest rates

Noting that the spike in India’s October retail inflation to 6.2% amid a sharp jump in vegetable prices marked the first breach of the RBI’s inflation tolerance band of 2% to 6% [with a median target of 4% inflation], Moody’s said “sporadic food price pressures continue to inject volatility” in India’s disinflation trajectory.

“Despite the near-term uptick, inflation should moderate toward the RBI’s target in the coming months as food prices ease amid higher sowing and adequate food grain buffer stocks. Even so, potential risks to inflation from heightened geopolitical tensions and extreme weather events underscore the RBI’s cautious approach to policy easing,” the outlook emphasised.

“Although the central bank shifted its monetary policy stance to neutral while keeping the repo rate steady at 6.5% in October, it will likely retain relatively tight monetary policy settings into next year given the fairly healthy growth dynamics and inflation risks,” Moody’s said, indicating it believes an interest rate cut is off the cards in RBI’s December monetary policy review.

On the consumption front, the ratings agency expects it to grow thanks to higher spending in the ongoing festive season and a sustained pickup in rural demand on the back of an improved agricultural outlook.

“Additionally, rising capacity utilization, upbeat business sentiment and the government’s continued thrust on infrastructure spending should support private investment. Sound economic fundamentals, including healthy corporate and bank balance sheets, a stronger external position and ample foreign exchange reserves also bode well for the growth outlook,” it concluded.

For the G-20 economies, which account for 78% of global GDP, Moody’s expects growth to slow to 2.8% this year, from 3% in 2023, before cooling further to 2.6% and 2.5%, over 2025 and 2026, respectively. G-20 emerging markets will grow by 4.3% in 2024, down from 4.8% in 2023 and then decelerate to 3.9% in 2025 and 3.8% in 2026, the firm said, attributing the moderation largely to its expectation of a continuing slowdown in the Chinese economy amid “considerable external headwinds”.