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UBS has downgraded its GDP growth forecast for India for the current financial year from 7.7 to 7.0 percent, adding that the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) risks failing to meet its inflation mandate.
The reduced forecast is one of the lowest expected by economists. Earlier this month, the RBI had surprised by lowering its own projection from 7.8 to 7.2 percent on risks from Russia’s invasion of Ukraine.
The central bank’s survey of professional forecasters released on April 8 pegged GDP growth for this year at 7.5 percent.
India’s economy likely grew 8.9 percent in FY22, as per the statistics ministry’s second advance estimate.
According to UBS, high global commodity prices, slower global growth, hit to domestic demand from the income shock of high fuel prices and elevated inflation, and the risk of the central government diverting money from capital expenditure towards subsidies will cause the Indian economy to grow at a slower clip this year than previously expected.
“There also seems to be a divergence in growth between urban and rural economies. The economic indicators for urban growth seem to be doing reasonably well (so far)… However, those for the rural economy remain a drag,” UBS economists noted in a report on April 22.
“Going forward, we believe the passthrough of high global commodity prices (especially oil, fertiliser, edible oils and food to some extent) to the real economy will affect households’ purchasing power (and hence consumption) and company margins, and constrain the fiscal space available to spend on productive sectors, including capex,” they added.
MPC to fail?
Faster-than-expected normalisation of monetary policy due to rising macroeconomic risks could also constrain economic growth.
Data released on April 12 showed consumer price index (CPI) inflation shot to a 17-month high of 6.95 percent in March. While inflation was seen rising, the extent of the increase was far more than forecast and has prompted economists to bring forward their rate hike expectations.
“We see risks of higher inflation than the MPC’s upper threshold of six percent for at least three quarters (March, June and September quarters). In such a scenario, the statutory mandate of keeping inflation within the two-six percent band in three consecutive quarters would be breached,” UBS said.
The RBI’s most recent forecast from April 8 sees CPI inflation at 6.3 percent in April-June and 5.8 percent in July-September. Inflation averaged 6.3 percent in the first quarter of 2022.
UBS sees CPI inflation averaging 6.2 percent in FY23, 50 basis points higher than RBI’s forecast of 5.7 percent.
“We expect the rate hike cycle to begin from June 2022 policy and the MPC could cumulatively hike repo (policy) rate by 100 basis points to five percent by end-FY23,” it said.
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