India Outlook Report 2023

The global economy is facing significant headwinds with multiple factors bolstering concern of a slowdown in a broad scale as many economies will go through recession in 2023. Indian economy is linked to the global economy through various channels such as trade, capital flows, etc. and will bear spillover impact of global volatilities. However, Indian economy remains a bright spot with strong structural parameters that are providing fillip to macro economic growth outlook.  Healthy balance sheets of financial and non-financial companies are providing resilience and financial stability in the system.

Domestic retail inflation measured in terms of consumer price index (CPI) remained stubbornly high and above 6% which is the upper tolerance band of monetary policy committee for 10 straight months from January to October 2022 before moderating below 6% in November and December. Inflation moderated to 6.12% in Q3FY23 vis-à-vis 7.04% in Q2FY23. To tame inflation; the Monetary Policy Committee had raised the policy repo rate cumulatively by 225 basis points in 2022 since its off-cycle rate hike of 40 basis points in May.  We expect the RBI to take the terminal repo rate to 6.50% by delivering another rate hike. Going ahead inflation is expected to cool off with decline in food prices during winter. Inflation is expected to stay below 6% during Q4FY23. For Full year of FY23 we expect the CPI inflation to be about 6.6%. For FY24 we project inflation to average at 5.1%. Overall the banking system liquidity remained in surplus although stayed marginally in deficit during last week of December. RBI has been mopping up excess liquidity that led to sharp increase in short-term rates which caused flattening of yield curve. The RBI is expected to maintain system liquidity at a level that is about 0.5-1% of net demand and time liabilities. G-Sec yield curve will remain steeper at the short-end as excess liquidity will come down going forward but the long-end of the curve including 10-year benchmark can remain flat or even soften as inflation has moderated and most of the rate hiking is over. The Union Budget FY24 is expected to maintain a fiscal glide path and may target fiscal deficit as percentage of GDP at about 6%. Indian companies sold bond through private placements worth INR 5.6tn during April-December FY23. The spread on corporate bond over G-Sec of same tenor came down in 2022; however, with increase in issuance of corporate bonds in 2023 we expect the spreads to increase.  Indian banking system now stays at a sweet spot with improved balance sheet on account of multi-year low non-performing assets and augmented capital base. Bank lending accelerated and became broad based with double digit bank credit growth across various segments. Bank credit is expected to maintain impressive growth in 2023 despite higher rates.

On growth; the economy will get impacted by external headwinds that will impact GDP through trade channels. However, domestically private consumption is peaking up with recovery in contact intensive services that will aid urban consumption amid higher interest rates. Service sector will drive growth of the economy with recovery in discretionary spending on travel, tourism and hospitality. Resilient agriculture sector will provide fillip to rural consumption. On investment, FDI inflows remained robust with strong domestic fundamentals. Import of non-oil, non-gold items remained high during FYTD23. Central government capex has remained higher and production of capital goods is up during April-November FY23. Union Budget FY24 is expected to keep its focus on capex. Investment outlook will remain bright in 2023 led by government capex, softening commodity prices which will lead to healthier corporate balance sheet.

For FY23; GDP is estimated to grow by 7% and for FY24 growth is projected at 6.5%.

January 20, 2023

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