What 2022 could hold for India

Expect credit growth to improve even as inflation normalises at a balanced level

We expect credit growth to inch into double digits next year and remain in that range for the near future.

By Rashesh Shah

What would make for a truly happy 2022 for India is the onset of some new long-term trends and the sunset of some existing ones. We hope that this near year brings for us the end of the pandemic, normalisation of inflation after a volatile 2021, soft landing on liquidity easing without any hiccups, return of credit growth, and geopolitical de-risking and easing of hostilitiesClearly, the biggest worry in 2022 relates to Omicron. However, there are two factors which make us optimistic of what this holds for the future.

One, Omicron has been found to be much less severe than earlier variants, evident from the much lower hospitalisation and death counts. Two, being more transmissible, Omicron is quickly becoming the dominant variant, leading to milder overall effects of Covid. Therefore, while it is difficult to predict the whens and hows, it looks likely that this could be the last strain of concern.

We are hopeful that the new year will also be the last time we are faced with so much uncertainty and suffering. The transition of Covid to a regular, seasonal issue with mild symptoms could be a major turning point. In the meanwhile, the government continues to be proactive in managing the impact with the vaccine availability for children as well as introduction of booster shots for vulnerable sections.

We must undertake all necessary precautions to minimise spread.Next is the issue of inflation. There has been widespread debate on whether it is transient or will sustain; 2022 would provide a clear answer: Another year of sustained inflationary trends can’t be termed merely transitory. It is quite likely that inflation is here to stay. However, it is also likely that these inflationary trends would be more muted in FY22 compared to FY21.

The kind of knee-jerk inflationary trends we saw in 2021, especially in some global commodities, should rationalise, though they are not completely going away any time soon. Global inflation is expected to be in the 2-3% range, unlike the historical levels of sub-2%. The same would reflect in India as well, with inflation higher than the long-term target of 4%. Hence, while inflation might continue, we should see the trends stabilise at a balanced level.

A direct consequence of this higher inflation would be a reversal of easy liquidity we have seen since the onset of the pandemic. We are already seeing some hawkishness in the central bank’s commentary. As inflation becomes even more pronounced, we can expect to see a turnaround in the low-interest -rate scenario, with rate hikes across key economies. India is better placed for such a scenario than many other economies.

While there will be short-term reactions, the very fact that our response to the pandemic was well thought-out and not predicated on unleashing a torrent of liquidity through government borrowing means a rise in global rates will see a comparatively milder long-term impact on our economic success. A soft landing following  liquidity withdrawal would be a key transition point to continue on our recent growth trajectory.  

Another key trend to watch would be credit growth. Credit growth, over the last couple of years, has been languishing in the mid-single digits. This has been due to multiple factors: overall sluggishness in the economy, pandemic-induced weakness, legacy asset quality issues, amongst others. However, as growth picks up and legacy issues like ILFS and other asset-quality challenges are behind us, it is imperative that credit growth also starts picking up. While government support and the overall global liquidity comfort has driven growth in the last 12 months, a sustained economic upcycle can only be on the back of a healthy credit regime.

We believe that next year will see credit growth across segments, both retail as well as corporate. Both banks and NBFCs are today well-placed to scale up their existing credit portfolios. We expect credit growth to inch into double digits next year and remain in that range for the near future.The last couple of years, especially with the emergence of Covid and the regime change in the biggest economy in the world, have indicated less than cordial relations between the two largest economies in the world.

As China emerges as a global force competing with the US, the American government will be wary of its rising influence as also of the pronouncements of the demise of the dollar as a global currency. In some ways, this could be beneficial for India as developed economies look for alternatives to China, though realising this will take a lot of work from our corporates as well as the government. However, any geo-political conflict could be detrimental to a world emerging from a long-drawn pandemic and we hope that that the hostilities gradually ease out. By all counts, 2022 will bring with it some key changes that will be positive for India. Both global and domestic overlays seem to be going in the right direction for us and we anticipate the trends mentioned above to also move in a similar way. 

Chairman, Edelweiss Financial Services

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