Moody's cuts India's GDP growth forecast to 7.7% in 2022

Moody's Investors Service expects India's real GDP growth to slow to 7.7% in 2022 amid rising interest rates, uneven distribution of monsoons, and slowing global growth.

"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," says the ratings agency.

This is the third cut in India's GDP growth forecast by Moody's this year. The ratings firm had slashed its growth projections for India during the calendar year 2022 to 8.8% in May. Prior to that, it reduced its February growth projection of 9.5% to 9.1% in March.

Inflation remains a challenge with the Reserve Bank of India (RBI) having to balance growth and inflation, while also containing the impact of imported inflation from the year-to-date depreciation of the Indian rupee against the US dollar of around 7%, says Moody's.

The Indian economy grew at 13.5% year-on-year during the quarter ended June 30, 2022 owing to a low base and improved economic activity, showed data released by the government on Wednesday.

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. The RBI forecasts that the inflation rate will remain high into 2023, at 5.8% in the January–March period and 5.0% in April–May.

In August, the RBI raised the policy repo rate for a third time by 50 basis points to 5.4%.

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

"We also expect inflationary pressures to weaken in the second half of the year and further next year. A quicker let up in global commodity prices would provide significant upside to growth," the ratings agency says.

Moody's expects economic growth to be stronger than its projections in 2023 if the private-sector capex cycle were to gain steam.

India's economic growth before the Covid-19 pandemic had materially slowed because of the impact of corporate-sector deleveraging on business investment, says Moody's.

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, it further adds.

High-frequency data for the Indian economy shows strong and broad-based underlying momentum in the first four months of fiscal year 2022-23, says Moody's. Services and manufacturing sectors have seen robust upswings in economic activity, according to hard and survey data, such as PMI, capacity utilisation, mobility, tax filing and collection, business earnings and credit indicators.