Moody's cuts CY22 India GDP growth forecast to 8.8% amid rising inflation

Says rise in crude, food, and fertiliser prices will weigh on household spending

Moody’s Investors Service on Thursday lowered its gross domestic product (GDP) growth forecast for India to 8.8 per cent for calendar year 2022 (CY22) from its March estimate of 9.1 per cent, holding that rising inflation and interest rates will temper the economic growth momentum.

“The rise in crude oil, food, and fertiliser prices will weigh on household finances and spending in the months ahead. Rate increases to prevent energy and food inflation from becoming more generalised will slow the demand recovery’s momentum,” the rating agency said in its latest Global Macro Outlook.

However, Moody’s added that unless global crude oil and food prices rise further, the economy seems strong enough to maintain solid growth momentum.

“High-frequency data suggest that the momentum from Q4 2021 carried through into the first four months of this year because of strong reopening momentum. Strong credit growth, a large increase in investment intentions announced by the corporate sector, and a high budget allocation to capital spending by the government indicate that the investment cycle is strengthening,” it added.

Moody’s expects India’s retail inflation to increase to 6.8 per cent in 2022 from 5.7 per cent in 2021. Retail inflation touched a near eight-year high of 7.8 per cent in April.

In a surprise off-cycle policy review, the Monetary Policy Committee of the Reserve Bank of India (RBI) earlier this month increased the repo rate by 40 basis points, with inflation remaining above the central bank’s upper tolerance limit for four consecutive months. RBI Governor Shaktikanta Das on Monday said expectations of another round of rate hike in the June meeting of MPC is a “no-brainer”.

Even after the latest downward revision, the GDP forecast by Moody’s remains among the most optimistic. While the RBI has projected that the economy will grow 7.2 per cent in financial year 2022-23 (FY23), Fitch expects the economy to grow 8.5 per cent. To be sure, Moody’s has not yet revised its FY23 GDP forecast for India, which remains at 9.1 per cent.

Moody’s also lowered its global growth projection to 3.1 per cent for 2022 on account of the negative factors. “The main drivers of the slowing economic momentum are ongoing supply shocks that are stoking inflation and eroding consumer purchasing power, and a shift toward more hawkish monetary policy globally, accompanied by financial market volatility, asset repricing and tighter credit conditions,” it said.

The rating agency said the post-pandemic global economic recovery faces a complex set of challenges. “Several crosscurrents have hit the global economy all at once, and will slow growth more significantly than we envisaged only a few months ago. The economic spillovers of the Russia-Ukraine military conflict are still unfolding, as is the effect on global growth from the slowdown in China amid strict enforcement of its zero-Covid policy. Although we expect headline inflation rates to ease through next year, price levels remain high and will weigh on consumer demand,” it added.

Moody’s said the primary focus of inflation-targeting central banks in the current scenario will be to keep households’ medium-term inflation expectations from rising above targets, thereby preventing the emergence of a self-perpetuating and vicious wage-price spiral.

“The shift toward a more hawkish monetary policy stance over the last few months has come with a rise in financial market volatility and asset repricing. Credit conditions have preemptively tightened well ahead of central bank actions. Bond yields the world over have risen in anticipation of further interest rate hikes, equity prices have fallen from their peaks, and the US dollar has strengthened.” All together, these developments set the stage for a more pronounced slowing of the global economy than we envisaged only a few months ago,” it added.