A day after official data estimated a lower-than-expected rate of expansion for the Indian economy in the June quarter, Moody’s Investors Service on Thursday sharply trimmed its real growth forecast for the country to 7.7% for the calendar year 2022, from its earlier projection of 8.8%.

Goldman Sachs, too, cut its 2022 growth forecast for India to 7% from 7.6%; for the fiscal year (FY23) as well, the projection is now pegged at 7%, against 7.2% earlier. Similarly, Morgan Stanley said there is a downside risk of 40 basis points to its growth estimate of 7.2% for FY23, thanks to weaker-than-expected growth in investments and higher drag from net exports.

The June quarter growth of 13.5% was closer to the lower band of the 12-17% range forecast by analysts and below the 16.2% predicted by the Monetary Policy Committee.

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Lowering its projections, Moody’s stated that rising interest rates, uneven distribution of monsoons, and slowing global growth are expected to dampen India’s economic momentum on a sequential basis. India’s growth is projected to drop further to 5.2% in 2023, it said, partly as the base normalises.

A number of global agencies have trimmed their growth projections for India (and for the world) in recent months, after the Ukraine war pushed up global prices of commodities, especially of oil. The IMF recently scaled down its FY23 India growth forecast to 7.4% from 8.2% projected in April. The World Bank, too, trimmed it to 7.5% from 8% and S&P to 7.3% from 7.8%.

Moody’s has now slashed its G-20 growth forecasts to 2.5% for 2022 from its May projection of 3.1%; the growth is predicted to ease further to 2.1% in 2023. Subdued global growth typically hurts India’s export performance and can potentially cause trade deficit to hit another record, especially as imports remain elevated this fiscal, analysts have said.

Commenting on India in its latest Global Macro Outlook, Moody’s said: “We also expect inflationary pressures to weaken in the second half of the year and further next year.” A quicker let-up in global commodity prices, it said, would provide “significant upside to growth”. “In addition, economic growth would be stronger than we are projecting in 2023 if the private-sector capex cycle were to gain steam,” the agency added.

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Moody’s also stated that 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, aided by “investment-friendly government policies and the rapid digitization of the economy”. The Indian economy had materially slowed, even before the pandemic, because of the impact of corporate-sector deleveraging on business investment.

The Reserve Bank of India, Moody’s said, will likely remain hawkish this year and maintain a reasonably tight policy stance in 2023 to prevent domestic inflationary pressures from building further. Retail inflation hit a five-month low of 6.71% in July; but it still remained above the upper band of the central bank’s 2-6% medium-term target for a sixth straight month.

The RBI has forecast that inflation will remain high into 2023 and has hiked the repo rates three times since May to 5.4%, above the pre-pandemic level, to tame inflation.

While slashing the G-20 growth forecast for 2022 and 2023, the agency stressed that the Russia-Ukraine conflict remains central to the larger macroeconomic picture. 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. “China’s low tolerance for Covid-19 outbreaks and weakness in its property sector pose risks to its growth outlook,” it said.

Within the G-20 grouping, the US economy is expected to grow just 1.9% in 2022 and 1.3% in 2023, down from 5.7% in 2021. Similarly, the Euro area growth is now pegged at only 2.5% in 2022 and 0.3% in 2023, against 5.2% in 2021. Of course, the 2021 growth rates were boosted by conducive base effect.

The agency said global trade in durable goods and commodity prices are set to soften and that a pullback in goods demand is underway. Supply-chain problems are easing and producer price inflation appears to have peaked in several countries.

In signals that tight monetary conditions will persist in the coming quarters, Moody’s said even if core inflation continues to soften, the US Fed funds rate, which is now around the estimated neutral rate, is likely to remain restrictive through 2023. “For most other major central banks, upside risks to inflation remain, and hence keeping monetary policy relatively tight will be imperative for the credibility of their policy objectives,” it added.