S&P cuts India's growth forecast for FY23 to 7.3%, sees inflation at 6.3%

S&P Global Ratings on Wednesday slashed India’s growth forecast to 7.3 per cent from 7.8 per cent for FY23 on rising inflationary pressure and longer-than-expected Russia-Ukraine war.

The rating agency increased its inflation forecast for India by 90 basis points (bps) to 6.3 per cent for the current fiscal year.

“Since our most recent growth forecast at the end of March, a number of macro variables have deteriorated. These include weaker first-quarter numbers in many countries, higher energy and commodity prices, a longer-than-expected Russia-Ukraine conflict, faster monetary policy normalisation and slower Chinese growth. The balance of risks to our baseline has deteriorated since our last forecast and remains firmly on the downside,” S&P said in its latest Global Macro Update.

The rating agency also pared US growth forecast for 2022 by 80 bps to 2.4 per cent while China’s growth projection now stands at 4.2 per cent, down 70 bps from the March estimate.  

S&P said faster monetary policy normalisation will slow demand more than previously expected.

“With only a few exceptions, many Asia-Pacific central banks are raising or are expected to raise rates sooner than we forecast in our previous round. These actions will work through wealth effects as asset prices (financial and non-financial) moderate or decline, and through the spending channel as the cost of borrowing rises,” it said.

S&P said the weakness in China, spillovers from the war in Ukraine, domestic monetary tightening and rapidly-tightening global financial conditions are all headwinds for emerging market economies. “Emerging markets in Asia are the most at risk from weakening consumption in China. They are also among the most at risk from further supply-chain disruptions, albeit manufacturing continues to operate with limited disruptions under pandemic restrictions,” it added.

The rating agency assumes that the Russia-Ukraine conflict is more likely to drag on and escalate than end earlier, pushing the risks to the downside.

“A hard downside scenario would involve a broad-based trade rupture between Russia and the German-centred industrial complex, taking down growth, incomes, employment, and confidence, and spreading to the rest of the global economy,” it added.

 The second main worry is inflation remaining higher for longer, requiring central banks to raise rates more than is currently priced in, risking a harder landing, including a larger hit to output and employment, S&P said. “In a particularly bad variation of this risk, fuel and food inflation would remain high even if core inflation (which central banks more directly control) declines, leading to stagflation,” it said.

The United Nations in its latest World Economic Situation and Prospects report released on Wednesday also pared down its FY23 growth projection for India to 6.4 per cent from 6.7 per cent estimated earlier, holding that higher inflationary pressures and uneven recovery of the labour market will curb private consumption and investment.

Inflation set to avg to 9-yr high at 6.9% in FY23: Ind-Ra

The average headline inflation is set to accelerate to a nine-year high at 6.9 per cent in FY23, and the RBI may go for more rate hikes during the fiscal, India Ratings and Research said on Wednesday.

"The first rate increase by the RBI could be of the order of 0.50 per cent in the June 2022 policy and another 0.25 per cent in the October 2022 policy," the agency said.