Moody’s Investors Service Cuts India’s GDP Growth Forecast Again

Moody's Investors Service has cut India's economic growth projection for the second time this year on rising interest rates and slowing global growth.

The ratings agency has lowered its India GDP growth forecast to 7.7% for 2022 from 8.8% projected in May, when it had cut the estimate from 9.1%, according to its August update of the Global Macro Outlook for 2022-23.

“Our expectation that India's real GDP growth will slow from 8.3% in 2021 to 7.7% in 2022 and to decelerate further to 5.2% in 2023 assumes that rising interest rates, uneven distribution of monsoons, and slowing global growth will dampen economic momentum on a sequential basis,” Moody's said in the update.

Yet, the ratings agency said high-frequency data for the Indian economy shows strong and broad-based underlying momentum in the first four months of FY23. Services and manufacturing sectors have seen robust upswings in economic activity, according to hard and survey data, such as Purchasing Managers' Index, capacity utilisation, mobility, tax filing and collection, business earnings and credit indicators, it said.

But inflation remains a challenge with the Reserve Bank of India having to balance growth and inflation, while also containing the impact of imported inflation from the year-to-date depreciation of the rupee against the U.S. dollar of around 7%, Moody's said.

Although inflation eased slightly to 6.7% in July, it remains above the central bank's target range of 2%-6% for the seventh straight month, it said. The RBI forecasts that inflation rate will remain high into 2023, at 5.8% in the January-March period and 5.0% in April-May.

The RBI is likely to remain hawkish this year and maintain a reasonably tight policy stance in 2023 to prevent domestic inflationary pressures from building further, Moody's said.

Inflationary pressures, it said, are expected to weaken in the second half of the year and further next year. “A quicker letup in global commodity prices would provide significant upside to growth. Also, economic growth would be stronger than we are projecting in 2023 if the private-sector capex cycle were to gain steam.”

India's economic growth before the Covid-19 shock had materially slowed because of the impact of corporate-sector deleveraging on business investment. 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, supported by investment-friendly government policies and the rapid digitisation of the economy, Moody's said.

It slashed its 2022 growth projections for G20 economies to 2.5% for 2022 from 3.1% forecasted in May. The global growth outlook continues to weaken, particularly as financial conditions have tightened following moves by central banks to tamp down persistent and broad-based inflation, Moody's said. Although the outlook is decidedly negative, high-frequency data point to nascent stabilisation after a tumultuous first half of 2022, it said.