Indian economy to grow at 6.8% this fiscal, CAD may widen to 5.5% of GDP in Q2 FY23


The ongoing war between Russia and Ukraine has created a deep-seated episode of hot inflation around the world. While commodity prices are sharply off their highs, global growth concerns remain, led by severe monetary tightening likely to last at least into December. According to analysts at Motilal Oswal Financial Services, India currently appears isolated from the challenges of high inflation and slow growth. However, that isolation will fade over the next few months. Although analysts raised India’s real GDP growth for FY23 to 6.8%, they left the FY24 forecast broadly unchanged at just 5.5%, much lower than the consensus of 6.3%. “A severe global recession poses downside risk to our below-consensus growth forecast,” they said.

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Global monetary tightening will have serious consequences for growth

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According to the report, despite raising interest rates sharply since April this year, the RBI has left its growth forecast unchanged at 7.2%. This is in stark contrast to the most advanced economies, which have revised their growth forecasts downwards significantly. Global monetary tightening is expected to have severe implications for growth in CY23/FY24, reflected in Motilal Oswal’s forecast of 5.5% growth next year versus a market consensus of over 6.3%. While RBI is forecasting 6.7% year-on-year growth for Q1 2024, the brokerage house sees it at just 5.3%. “India’s nominal GDP growth could moderate to 9.4% in FY24 compared to average growth of 13.6% between FY04 and FY19,” it said.

CPI inflation seen at 6.7% in FY23, RBI could raise repo rate to 6% by end-December

At the same time, it cut FY23 CPI inflation forecast to 6.7% from 7% previously, leaving FY24 unchanged at 5.2%. “We do not expect headline inflation to ease to the 4% medium-term target before FY25. However, it is likely to ease towards 5.0-5.5% in FY24, similar to real GDP growth,” he added. With the repo rate already at 5.4%, analysts have raised their forecast for the end repo rate to 6.0% from 5.5% in December. According to the analysts, the RBI may have many more months to draw comfort from headline inflation of 5% and pause its FY24 episode of rate hikes. The brokerage sees just two more rate hikes — 35 basis points later this month and another 25 basis points in December, implying a 6% terminal repo rate by year-end.

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Expand CAD, rupee could drop to 82 per dollar

However, if the RBI remains concerned about the rupee and is more focused on the 4% target, another rate hike can be expected in February next year, which will take the repo rate to 6.25% this cycle, they said analysts. As India’s external position has also deteriorated rapidly, the current account deficit (CAD), a key indicator of a country’s balance of payments, is expected to widen to 3.7% of GDP in Q1 2023 and 5.5 in Q2 2023 % of GDP will peak CAD at a decade high of 3.8% of GDP in FY23. Meanwhile, the RBI said in its bulletin that India’s CAD is likely to remain within 3% of GDP in 2022-23, up from 1.2% last fiscal year. According to Motilal Oswal’s report, India’s foreign exchange reserves could fall to $530 billion this year. Accordingly, the Indian rupee (INR) is expected to cross 82/USD in 4QFY23E and remain above 80/USD in 2023.

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