Moody’s raises GDP growth forecast for India to 5.5% in 2023

According to government data released on Tuesday, India’s GDP growth declined to 4.4 per cent in the December 2022 quarter as against 6.3 per cent growth in the September 202 quarter.

The rating firm also expects further rate hikes in the US totalling 50 basis points to 75 bps over the next two to three meetings of the Federal Open Market Committee (FOMC), taking the terminal rate up to as high as 5.25 per cent to 5.50 per cent.

In the case of India, the upward revisions additionally incorporate the sharp increase in capital expenditure budget allocation to Rs 10 lakh crore (3.3 per cent of GDP) for fiscal year 2023-24, up from Rs 7.5 lakh crore for the fiscal year ending in March 2023, according to Moody’s. “Economic momentum in a number of large emerging market countries, including India, Brazil (Ba2 stable), Mexico and Turkiye, has proved more resilient to last year’s tightening in the global and domestic financial environment than we had anticipated,” Moody’s said. An eventual letup in monetary policy tightening in the US will help stabilize, if not improve, capital flows to emerging market countries. However, until inflation in advanced economies is firmly in check, emerging markets will remain vulnerable to bouts of heightened financial market volatility, it said.

Risks to economic growth are tilted to the downside, notwithstanding the recent positive data surprises, it said. In particular, if demand conditions fail to meaningfully weaken and inflation remains elevated, a second round of monetary policy tightening would be inevitable, further weighing on economic growth. “The improvements in financial market conditions therefore may not last for long,” Moody’s said.

Furthermore, oil prices could be volatile in 2023, depending on how much additional oil demand China’s reopening will generate. A surge in oil prices would unwind the progress on inflation across both advanced and emerging market economies, further straining household finances, Moody’s said.

Unseasonably warm weather, gas storage at full capacity, increases in liquefied natural gas (LNG) imports from non-Russian sources and government assistance supported economic activity in Europe this winter. “While governments and businesses now have more time to take appropriate steps to ensure energy security through this year and next, the respite is temporary and the energy outlook remains highly uncertain,” it said.

In the US, the Fed slowed the federal funds rate increases to 50 bps in December, from 75 bps, and to 25 bps in February, bringing the rate to the 4.50 per cent-4.75 per cent range. “We do not discount the possibility, however, of even higher rates if the labour market remains tight. Unlike in previous cycles, we expect the Fed to keep the fed funds rate at the high terminal rate even as signs of economic weakness emerge in the second half of 2023,” Moody’s said.