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4QCY21 – India’s quarterly economic outlook

There is more uncertainty over GDP growth than inflation in India

* Real GDP growth in 2QFY22 was slightly higher-than-expected, which led to a small upward revision in our FY22 projections. What is notable, however, is the large divergence between FY23 growth forecasts of different agencies. We have also revised our FY23E growth expectations to 6.3%, which is much lower v/s the market consensus of 7.6% and RBI’s likely projection of 8-8.5%. It is clear that there is more uncertainty regarding GDP growth in India than the inflation trajectory. We keep our inflation forecasts broadly unchanged, which is in line with the market consensus and RBI projections. Since the RBI is more focused on growth (which is more uncertain) than inflation at this stage, it is very likely that the monetary policy normalization in India would be very gradual.

* Based on our revised estimates, we believe growth in total spending by the central government will be negligible (0.3% YoY) in the remaining five months of FY22E (Nov’21 to Mar’22). However, combined spending growth (Center + states) will be more decent at 8.3% during the period vis-à-vis 15% in Apr-Oct’21. In any case, capital spending is expected to grow much faster. The two-year CAGR in combined total receipts and spending in Apr-Oct’21 is much lower than the preCOVID average growth.

 In line with the divergent monetary policies and in light of recent trends, we have revised our USD:INR forecasts substantially. With a sharp rise in non-oil trade deficit, beginning of the monetary policy normalization by the US Federal Reserve, and the likelihood of gradual actions by the RBI, we now expect the INR to weaken by ~2.5% each in FY23E/FY24E and reach 80/USD by the end of FY24E.

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