The ongoing war between Russia and Ukraine has led to an entrenched episode of hot inflation across the globe. While the commodity prices have come off sharply from their peaks, global growth concerns persist, led by strong monetary tightening that is likely to continue at least until December. According to analysts at Motilal Oswal Financial Services, India seems isolated from the high inflation-slow growth challenges at present. However, this isolation will fade over the next few months. Although the analysts raised India’s FY23 real GDP growth to 6.8%, they have kept FY24 projection broadly unchanged at just 5.5%, much lower than the consensus of 6.3%. “A serious global recession presents a downside risk to our below consensus growth forecast,” they said.
Global monetary tightening to have serious consequences on growth
According to the report, although the RBI has hiked the policy repo rate sharply since April this year, it has kept its growth projections unchanged at 7.2%. This is in sharp contrast to the most advanced economies that have revised down their growth forecasts meaningfully. The global monetary tightening is expected to have serious consequences on growth in CY23/FY24, which is reflected in Motilal Oswal’s forecast of 5.5% growth next year vis-à-vis market consensus of over 6.3%. In fact, while the RBI projects a growth of 6.7% year-on-year in 1QFY24, the brokerage sees it at only 5.3%. “India’s nominal GDP growth could soften to 9.4% in FY24, compared to an average growth of 13.6% between FY04 and FY19,” it said.
FY23 CPI inflation seen at 6.7%, RBI may raise repo rate to 6% by Dec-end
At the same time, it has cut FY23 CPI inflation forecast to 6.7%, down from 7% earlier, keeping FY24 unchanged at 5.2%. “We do not expect headline inflation to fall towards the medium-term target of 4% before FY25. However, it is likely to ease towards 5.0- 5.5% in FY24, similar to real GDP growth,” it added. With the repo rate already at 5.4%, analysts have raised the terminal repo rate forecast to 6.0 from 5.5% earlier by December. RBI may have to draw comfort from 5% headline inflation for many more months and pause its rate hike episode in FY24, according to the analysts. The brokerage sees only two more rate hikes– 35 bps later this month, and another 25 bps in December, implying a terminal repo rate at 6% by year-end.
CAD to widen, Rupee may fall to 82 per dollar
If, however, the RBI remains concerned about the Rupee and focuses more on the 4% target, another rate hike can be expected in February next year, taking the repo rate to 6.25% in this cycle, analysts said. As India’s external situation has also worsened quickly, current account deficit (CAD), a key indicator of balance of payment of a country, is expected to widen to 3.7% of GDP in 1QFY23 and peak at 5.5% of GDP in 2QFY23, implying a decadal-high CAD at 3.8% of GDP in FY23. Meanwhile, RBI in its bulletin said that India’s CAD is likely to remain within 3% of the GDP in 2022-23 as against 1.2% during the last fiscal. India’s foreign exchange reserves could fall to $530 billion this year, according to Motilal Oswal report. Accordingly, the Indian Rupee (INR) is expected to cross 82/USD in 4QFY23E and stay above 80/USD in 2023.