High-frequency indicators show first quarter performance is on track to deliver 6.8% gross domestic product (GDP) for this fiscal.

We expect GDP to print 6.8% growth in the first quarter; the next three quarters are projected to grow at 6.8% on average.

The Purchasing Managers’ Index (PMI) for manufacturing and services remained in the expansion zone this fiscal till July. Merchandise exports, despite degrowth in July, are expected to do well. The expectation of higher trade volume growth this year will translate into better trade performance for India as well.

Although overall private consumption shows mixed trends in the first quarter, initial signs of pick-up in rural consumption are visible. We expect private consumption demand to improve this year over anaemic 4% growth in fiscal 2024.

The high-base effect apart, improvement in agricultural growth and lower food inflation will augur well for private consumption, particularly in rural areas. Higher agricultural growth will augment income and lower food inflation will improve discretionary spending ability.

In addition, government spending on employment and asset generating schemes (PM Awas Yojna for urban and rural areas) can provide additional support to consumption growth.

That said, unlike in the previous fiscal, rural consumption is expected to outpace urban as higher interest rates impact urban areas more. The signs of this are visible in the Reserve Bank of India’s (RBI) consumer confidence survey released in August.

The RBI’s Monetary Policy Committee (MPC) kept its stance and policy rates unchanged during the August review. Strong economic growth affords the RBI the elbow room to focus on inflation.

Food inflation is a hurdle for rate cuts and without a durable decline, headline inflation cannot be tamed to 4% on a sustained basis. A pick-up in food inflation in June dragged consumer inflation to 5.1%.

Food inflation dropped sharply to 5.4% in July from 9.4% in June and pulled the headline inflation to 3.5%, below the RBI’s target of 4%. The central bank will look through it since it is entirely high-base-effect driven.

Vegetable inflation will remain a key monitorable as climate risks continue to play out. July 2024 was the second hottest year in recorded history according to Copernicus Climate Change service.

We expect the MPC to begin cutting rates in October at the earliest and have penciled in two rate cuts this fiscal.

By then, the United States Federal Reserve would have initiated its own rate cuts and there would be clarity on food inflation as the monsoon would have played out.

Good progress on monsoon rains and sowing so far offers hope.