Indian GDP: Nomura cuts India’s 2023 GDP forecast to 4.7% as it expects growth to slow

Posted On: July 13, 2022

As fears of a global recession rise in an inflationary environment, analysts at Nomura have cut India’s 2023 growth forecast to 4.7% from the previous 5.4% as the company expects growth to slow next year.

“Higher inflation, monetary tightening, dormant private investment growth, the power crisis and the global growth slowdown pose medium-term headwinds. As a result, we have lowered our GDP growth forecast for 2023 to 4.7% from 5.4%,” the company said in a statement Communication co-authored by Aurodeep Nandi and Sonal Varma.

For FY23 they see GDP growth of 7.0% and for FY24 5.5%.

The Indian economy has surged above pre-pandemic levels and the improvement in growth has been broad-based across consumption, investment, manufacturing and the external sector.

However, inflation remains a sticking point. CPI inflation eased to 7.0% yoy in May from 7.8% in April, while core CPI inflation eased to 5.9% from 7.1%. This weakening was driven by a favorable base, a cut in fuel taxes and lower bullion prices.

Retail inflation has stayed above the Monetary Policy Committee (MPC) tolerance band for the sixth straight month. It averaged 7.3% in Q1FY23, which is below RBI’s estimate of 7.5%.

“Despite the government’s recent fiscal steps to fight inflation, upside risks remain from continued pass-through of higher input costs, pressure to reopen services, upcoming changes in electricity tariffs and heightened inflation expectations,” Nomura said.

Central banks around the world are now expected to aggressively raise interest rates to control inflation, even at the expense of growth.

The RBI raised the repo rate by 50 basis points to 4.90% in June, after a 40 basis point hike in early May.

“We expect consumer inflation to return to RBI’s target range only in the fourth quarter of the current fiscal year. For the financial year as a whole, we forecast average inflation of 6.6%. RBI policy actions will depend on volatility in global crude prices and the US Federal Reserve’s rate hike path. We see a 50 basis point rate hike in the August policy followed by incremental hikes of 25 basis points each in the following two sessions with the ending repo rate at 5.90%.

said chief economist Rajani Sinha.

With the pace of inflation picking up somewhat slower now, analysts believe the RBI may refrain from raising rates by 50 basis points in the coming sessions.

“Falling commodity prices and lower-than-expected inflation in the June quarter could lead the MPC to refrain from raising interest rates by 50 basis points,” Citi economists Samiran Chakraborty and Baqar M Zaidi wrote in a report.

“The possibility of a larger rate hike can only arise if sustained depreciation pressures on the rupee force the RBI to close the rate differential faster,” they said.