India’s real GDP growth will slow to 7.7 percent in 2022 from 8.3 percent in 2021, a recent report by Moody's stated. It will decelerate further to 5.2 percent in 2023, it predicts. Moody's. As per the report, rising interest rates, uneven distribution of monsoons, and slowing global growth will dampen economic momentum on a sequential basis.
In March, Moody's had forecast that India's economy could expand at 8.8 percent in 2022. Data released on Wednesday showed that Indian economy expanded 13.5 percent year-on-year in the April-June quarter, the fastest pace in a year.
"Economic growth would be stronger than we are projecting in 2023 if the private-sector capex cycle were to gain steam. India’s economic growth before the COVID-19 shock had materially slowed because of the impact of corporate-sector deleveraging on business investment," it explained. A quicker letup in global commodity prices would provide significant upside to growth, added Moody's.
Moody's also expects inflationary pressures to weaken in the second half of the year and further next year.
However, currently, inflation remains a challenge with the RBI having to balance growth and inflation, while also containing the impact of imported inflation from the year-to-date depreciation of the Indian rupee against the US dollar of around 7 percent, it noted.
Although inflation eased slightly to 6.7 percent in July, it remains above the central bank’s target range of 2-6 percent for the seventh straight month. The RBI forecasts that the inflation rate will remain high into 2023, at 5.8 percent in January–March period and 5 percent in April–May.
In August, the RBI raised the policy repo rate for a third time by 50 bps to 5.4 percent. The central bank is likely to remain hawkish this year and maintain a reasonably tight policy stance in 2023 to prevent domestic inflationary pressures from building further, says Moody's.
"With the deleveraging complete, corporate-sector investment is showing early signs of a pickup, which could provide support to a continued business cycle expansion through several quarters, supported by investment-friendly government policies and the rapid digitization of the economy," Moody's noted.
In the report, Moody's also reduced the 2022 real gross domestic product (GDP) growth forecast for G-20 countries to 2.5 percent from 3.1 percent made in May.
Moody's also cut the GDP growth forecast for the G-20 nations to 2.1 percent from 2.9 percent for the year 2023.
"Global monetary and financial conditions will remain fairly restrictive through 2023. Central banks will require decisive proof that high inflation no longer poses a threat to their policy objectives before letting up on their tight monetary stance. The challenging global economic environment of today will be resolved with a sharp and disinflationary slowdown in economic growth," Moody's pointed out.
For G-20 advanced economies, Moody’s forecasts 2.1 percent growth in 2022, and 1.1 percent in 2023, while for G-20 emerging market countries, it projects 3.3 percent growth in 2022 and 3.8 percent in 2023.
Although the global outlook is decidedly negative, high-frequency data point to nascent stabilization after negative macroeconomic surprises caused intense financial market volatility in the first half of 2022, it noted.
It further stated that the global trade in durable goods and commodity prices is set to soften.
"A pullback in goods demand is underway. Supply-chain problems are easing and global auto production is picking up. Producer price inflation, which is a broad measure of supply-side inflation, appears to have peaked in several countries. Importantly, inflation expectations remain anchored over the medium term," it said.
However, the invasion of Ukraine remains central to the larger macroeconomic picture, added the rating agency. While Moody’s believes it is unlikely the conflict will broaden beyond Ukraine’s borders, such an event would mark a significant escalation. Further, the risk of further energy shocks also remains high, as per Moody's.
Meanwhile, as for monetary policy, it will be tricky for central banks to navigate to an equilibrium where inflation falls but economic activity does not slip into a deep recession, forecasts the rating agency.
China's low tolerance for COVID-19 outbreaks and weakness in its property sector pose risks to its growth outlook, it further cautioned.
