While a recession in the US is almost inevitable, India will not be immune to a downturn in the world's largest economy, said a report from brokerage firm Nirmal Bang.
"India is not immune to a US recession and domestic growth in the past has slowed by nearly 1.5-2.5% even in normal Fed-led recessions without domestic macro stability concerns," said the brokerage firm.
"Assuming a mild US recession and GDP growth of 7.5% in FY23 in our base case, we believe that GDP growth could slow to 6% in FY24 (revised down from 7% earlier). Stable domestic fundamentals in terms of the strong financial sector and non-financial sector balance sheets, high forex reserve and some amount of counter-cyclical fiscal policy ahead of elections in FY24 will limit the growth slowdown to 1.5%," the brokerage firm added.
Nirmal Bang pointed out that the historical trends over the past 50-odd years suggest that recessions caused by the Federal Reserve are not uncommon and recessions caused by Fed tightening are usually shallow and short-lived and have lasted nearly one-three quarters with the average decline in GDP well under 1%.
The brokerage firm believes there are signs of a slowdown in the US amid rising interest rates. Mortgage rates increasing to the highest level since 2008 and the decline in housing starts is the most concrete evidence of an impending recession, Nirmal Bang said.
The brokerage firm added that historically, US recessions or slowing growth have been dealt with rate cuts by the Fed.
"We believe that the terminal Fed funds rate would likely be about 3-3.25% rather than the 3.8% indicated by the dot plot. Moreover, if a recession does fructify, we believe that some rate cuts cannot be ruled out in the second half of 2023, supported by easing inflationary pressures," said Nirmal Bang.
The domestic rate cycle has never moved counter to the US Fed rate action, but episodes of extended pauses are common, Nirmal Bang said, adding that the eventual moderation in crude oil prices and a weakening US dollar, which usually accompany a US recession, support domestic macro stability and a return of flows into emerging markets, including India.
"In the event of a US recession, we expect a decline in yields, rupee trading with a marginal depreciation bias against the dollar and muted but positive equity market returns in our base case," said Nirmal Bang.
Disclaimer: The views and recommendations are those of the broking firm and not of MintGenie.