Moody's Cuts India's Growth Forecast To 7% For 2022

Moody's Investors Service has lowered India's growth forecast citing rupee depreciation and high oil prices amid a weakening global outlook.

"We have lowered our 2022 real GDP growth projections for India to 7% from 7.7%," Moody's Investors Service said in a note on Friday. "We expect growth to decelerate to 4.8% in 2023 and then to rise to around 6.4% in 2024."

The downward revision assumes higher inflation, high interest rates and slowing global growth will dampen economic momentum by more than previously expected. The weakening of the rupee and high oil prices continue to exert upward pressures on inflation, which has remained above the Reserve Bank of India's 4% (-/+ 2%) target range for much of this year, it said.

Annual headline CPI inflation increased to 7.5% in September after dipping below 7% in July. Wholesale price inflation, however, has declined for four straight months, from a peak of 16.6% in May to 10.7% in September. From May to September, the RBI raised the repo rate by a cumulative 190 basis points to 5.9% in an effort to contain inflation risks.

"We expect the RBI to raise the repo rate by another 50 bps or so as part of its objective to anchor inflation expectations and support the exchange rate," Moody's stated. Eventually, the RBI will likely shift from inflation management to growth considerations, provided that the rate increases have the desired effect of taming inflationary pressures, it added.

Underlying growth dynamics are fundamentally strong, boosted by a rebound in services activity, according to Moody's. Government capital expenditure and manufacturing capacity utilisation have also improved. While September exports are down from the peak in March, they are still around 30% above the pre-pandemic level, Moody's said. Non-food credit growth shows solid momentum.

The private sector, having deleveraged after the RBI's asset quality review in 2015, is now well-positioned to increase capex spending. Also, the production-linked incentive scheme to attract investment in 14 key manufacturing sectors is showing results, it said. While these strengths will continue to support the domestic growth narrative, global financial tightening and slowing external demand will pose downward pressure on growth in 2023.

Real GDP growth of the G-20 economies is expected to decelerate to 1.3% in 2023, significantly lower than the previous estimate of 2.1% and down from an estimated 2.5% growth this year.

Growth outcomes of the G-20 emerging market economies will vary depending on economic structures, the release said. For instance, large domestically driven emerging market economies such as India and Brazil will be less vulnerable to weakening G-7 growth than will export-oriented countries, it said.