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Ratings agency India Ratings and Research (Ind-Ra) on Wednesday revised India's FY23 forecast downwards to 7-7.2 per cent.

Accordingly, the ratings agency believes that its 'FY23 Economic Outlook' released in January 2022 is unlikely to hold in view of the global geo-political situation arising out of the Russia-Ukraine conflict.

"Since the duration of Russia-Ukraine conflict continues to be uncertain, Ind-Ra has created two scenarios with respect to the FY23 economic outlook basis certain assumptions."

According to Ind-Ra, in scenario-one, crude oil price is assumed to be elevated for three months, and in scenario-two, the assumption is for six months, both with a half cost pass-through into the domestic economy.

"Ind-Ra expects GDP to grow 7.2 per cent YoY in 'Scenario 1' and 7 per cent YoY in 'Scenario 2' in FY23, compared to its earlier forecast of 7.6 per cent."

"However, the size of the Indian economy in FY23 will still be 10.6 per cent and 10.8 per cent lower than the FY23 GDP trend value in 'Scenario 1 and Scenario 2', respectively."

As per the agency, consumption demand as measured by private final consumption expenditure (PFCE) has been subdued in FY22, despite sales of select consumer durables showing some signs of revival during the festive season.

"As the consumer sentiment is likely to witness a further dent due to the Russia-Ukraine conflict leading to rising commodity prices or consumer inflation, Ind-Ra expects PFCE to grow at 8.1 per cent and 8 per cent in 'Scenario 1 and 2', respectively, in FY23, as against its earlier projection of 9.4 per cent."

Besides PFCE, Ind-Ra said that private capex by large corporates, which has been down and out over the past several years, had shown some promise lately in view of the roll-out of the 'Production-linked Incentive Scheme' and increased manufacturing sector capacity utilisation driven by higher exports.

"However, Ind-Ra expects the surge in commodity prices and disruptions in global supply chain caused by the Russia-Ukraine conflict to take a toll on their sentiments and there is a likelihood that this capex may get deferred till more clarity emerges with respect to the conflict."

"Government capex, however, is unlikely to be dented. By scaling up the capex to GDP ratio for FY22 to 2.6 per cent as per revised estimate from the budgeted 2.5 and budgeting the capex at 2.9 per cent of GDP for FY23, the government has been showing its resolve to do the heavy lifting."

Furthermore, the agency cited that although the Centre acknowledges the adverse impact of the Russia-Ukraine conflict on the ongoing Indian economic recovery, it is unlikely to scale down its fiscal support already announced in the FY23 budget.

"Even the RBI has so far resisted the temptation to tighten its monetary policy stance, despite retail inflation being close to its upper tolerance level and/or occasionally breaching it."

"Although there is a case for a 50bp increase in the policy rates in FY23, the RBI may still opt for accommodation, because it believes initiating a premature demand compression via a monetary policy action would be counterproductive, particularly when the recovery is fragile and there is an output gap in the economy."