Analysts and brokerage firms believe that even though the Indian economy looks resilient and the RBI expects healthy economic growth, India cannot remain isolated from the global slowdown.
There is a widespread belief that while the global growth slowdown concerns are mounting, the Indian economy appears to be on a strong footing thanks to its being a domestic-driven story.
Reserve Bank of India (RBI) Governor Shaktikanta Das on September 30 said economic activity in India remains stable despite the challenging global environment.
RBI projected real GDP growth for FY23 at 7% with Q2 at 6.3%, Q3 at 4.6%, and Q4 at 4.6%, with risks broadly balanced. The growth for Q1FY24 is projected at 7.2%.
Meanwhile, the RBI hiked its key policy rate (repo) by 50bp to 5.9%. The hike was in line with the market expectations. The RBI has the hiked repo rate by 190bp in three scheduled and one out-of-turn policy meeting.
Rate hikes are certain to impact economic recovery while a global slowdown will also weigh on domestic growth.
"Notwithstanding the weaker-than-expected real GDP growth in Q1FY23, RBI has increased its projections for the second half of FY23 (to 4.6% from nearly 4% earlier) and for FY24 (to 6.5% from 6.3% in Apr’22, as per the Monetary Policy Report). It reflects RBI’s confidence in India’s divergent growth which can fuel further rate hikes. As we do not see India remaining isolated from a global slowdown, we expect further growth downgrades in the economy, especially for FY24," said brokerage firm Motilal Oswal Financial Services.
After the Covid shock, the world was dealt a blow by the Ukrain war which shot up the commodity prices, including crude oil, fertilisers and energy and also caused supply chain disruptions, which led to an increase in food prices as Ukraine and Russia are the major food suppliers.
All this has pushed inflation to multi-year high levels, making central banks rush to lift rates aggressively. A sharp hike in rates and reduction of liquidity is most likely to erode the strength of the global economy. Some analysts believe the world is going to see the worst recession in recent history.
As MintGenie reported earlier, the Organization for Economic Cooperation and Development (OECD) said that the Ukraine Crisis and Covid-19 pandemic have hit the global economy hard in 2022 and the stains of this will continue into the next year.
OECD reduced its global economic growth forecast for 2023 to 2.2%, down from 2.8% in June, representing around USD 2.8 trillion in lost global output in 2023. For India, the OECD retains a GDP growth projection of 6.9% for FY23.
Rating agency Moody's believes the global economy will grow 2.7% in 2022 and expects growth to slow down to 2.3% in 2023.
Analysts said the global slowdown is going to impact India's economic recovery and RBI rate hikes will add to the gloom.
"India’s growth forecasts could see further downgrades due to a slowdown in global demand in addition to the lagged impact of rate hikes. India’s recovery is yet incomplete and lagging pre-Covid levels in few sectors," said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
Asutosh Mishra, Head Of Research, Institutional Equity, Ashika Group believes India may see further growth downgrades.
"Probably yes. We may see some more downward revision of GDP estimates by RBI post the downgrade of FY23 GDP estimates to 7% from 7.2%. This can be primarily attributable to expected cool off in real estate sector and export-oriented sector," said Mishra.
However, the country may not see the pain like its Western counterparts.
As per Joseph Thomas, Head of Research and Economist, Emkay Wealth, aggressive rate hikes to contain inflation may affect economic growth adversely to some extent but the impact would differ from economy to economy.
"The Indian economy is quite resilient in this respect as it is evidenced by the fact that growth picked up very fast in the post-pandemic period. Domestic GDP growth may not undergo significant downward revisions due to robust demand, the likely performance of the manufacturing industry, the pursuit of an appropriate growth-stability trade-off by the RBI, and the multiple initiatives like the PLI from the government to promote business and manufacturing," said Thomas.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.