Highlights:
Global Economy
- Fed keeps policy rate unchanged. Policymakers stick to plans of three rate cuts in 2024.
- BoJ raises short term interest rate after 8 years.
- Markets expect 75bps of Fed rate cuts in 2024 starting June vs earlier expectation of 150bps starting May.
Domestic Economy
- Urban demand indicators hold up well; Rural demand remains sluggish.
- Retail inflation held steady at 5.1% in Feb, Core and services inflation trended lower.
- Inflation projected to average at 5.4% in FY24 and 4.8% in FY25.
- CAD improved to 1.2% of GDP in Q3 FY24 from 1.3% in last quarter.
- Healthy services trade surplus and transfers supported narrowing in CAD.
- CAD likely to be at 0.6-0.7% of GDP in FY24 and ~1% in FY25.
- Net FPI inflows were ~USD 41 bn in FY24 vs net outflows of ~USD 6 bn in FY23.
- INR depreciated ~1% in March with a rebound in dollar index, CNY depreciation and year-end dollar demand.
- Liquidity deficit narrowed in March due to govt. spending and as RBI took delivery of the USD/INR sell-buy swap.
- States to borrow Rs 2.5 lakh crore in Q1 FY25 (51% higher Y-o-Y).
- Centre to borrow Rs 7.5 lakh crore in H1 FY25, equivalent to 53% of FY25 gross borrowings and lower than last year.
- We expect RBI to maintain the status quo in the April meeting.
- RBI is likely to start rate cuts in Q4 2024 as the Fed starts cutting rates in H2.
- RBI’s rate cut cycle to be shallow (25bps each in Q4 2024 & Q1 2025).
- We expect 10Y G-Sec to be 6.5 – 6.6% by the end FY25.
