Strong domestic demand will aid growth in the near term, as global slowdown batters exports, said Moody’s Investor Service, reaffirming its 6.7% growth forecast for the Indian economy for 2023.
“With exports remaining weak amid an unfavourable global economic backdrop, strong domestic demand will likely sustain growth in the near-term,” the research firm said Thursday, predicting the Indian economy to grow 6.1% in 2024 and 6.3% in the subsequent year.
India’s economy grew 7.8% in the April-June quarter; Moody’s expects growth momentum to have continued in subsequent quarters.
“High-frequency indicators show that the economy’s strong Q2 momentum carried into Q3. Robust goods and services tax collections, surging auto sales, rising consumer optimism and double-digit credit growth suggest urban consumption demand will likely remain resilient amid the ongoing festive season,” it said.
While it pointed to a nascent recovery in the rural economy, it was quick to note that a bounce back was contingent on monsoons.
“Rural demand, which has shown nascent signs of improvement, remains vulnerable to uneven monsoons that could lower crop yields and farm income,” it pointed out.
The World Meteorological Organization Wednesday said that El Nino conditions are expected to last till April 2024.
Moody’s also flagged uncertainties arising from the inflation trajectory and the lagged impact of the Reserve Bank of India’s 2.5 percentage point rate hike.
“Domestic demand dynamics beyond the festive season will depend on the trajectory of inflation and the lagged impact of the RBI’s monetary policy tightening,” the global research firm noted.
India’s inflation dipped to 5% in September after remaining above RBI’s upper target band of 6% for July and August, owing to vegetable price shock.
ET reported that prices are likely to rise again near 6% levels over November and December if onion prices remain high.
“Although core inflation also moderated to 4.5%, down from 4.8% in August, upside risks to headline CPI from potential spikes in food and energy prices amid erratic weather and geopolitical uncertainty will keep the RBI vigilant,” Moody’s Investor Service noted.
Reserve Bank of India held the policy rate at 6.5% for the fourth consecutive time in its October meeting.
“The Reserve Bank of India will keep rates on hold until Fed rate cuts are more clearly in sight. Ample reserves, solid domestic growth and largely contained inflationary pressures offer the central bank manoeuvrability of monetary policy calibration. However, given elevated external risks, the central bank is likely to keep interest rates high,” it said.
G20 concerns
The firm noted that global economic growth is expected to dip further in 2024 to 2.1% from 2.8% projected in 2023. New price shocks, geopolitical shifts and lingering rate effects were flagged as key risks to the outlook, with G20 countries showing diverging trends.
“India, Brazil, Mexico and Indonesia are particularly well-positioned to take advantage of this shift (away from China) and could emerge as engines of global growth,” it said.
