How Will A U.S. Recession Impact India? Nirmal Bang's Thematic View

Nirmal Bang Report

An analysis of U.S. recessions over the past 50-odd years suggests that recessions caused by the Federal Reserve are not uncommon. A saving grace is that recessions caused by Fed tightening are usually shallow and short-lived, and have lasted approximately one to three quarters with the average decline in gross domestic product well under 1%.

Incrementally, there are signs of a slowdown in the U.S. amid rising interest rates. Mortgage rates increasing to the highest level since 2008 and the decline in housing starts are the most concrete evidence of an impending recession.

Our analysis suggests that India is not immune to a U.S. recession and domestic growth has slowed by ~1.5-2.5% even in normal Fed-led recessions.

Assuming a mild U.S. 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).

In our view, stable domestic fundamentals in terms of 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%.

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