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Nominal GDP growth could be as low as 7.3% in FY24

* Year 2022 was an exceptional year in several manners. It began with an outright war between Russia and Ukraine, disturbing the entire global economy, and witnessed the sharpest interest rate hikes by global central banks in the past four decades. At the same time, it was captivating to see the tug-of-war between central banks and financial markets, with the latter shrugging off the former’s actions. We believe that growth concerns will emerge across the world, including India, in CY23/FY24, limiting rate hikes and reversing the current narrative.

* We keep our real GDP growth forecast for FY23 broadly unchanged at 6.9%; however, we lower our FY24 forecast slightly to 5.2% from 5.5% and introduce our FY25 projection at 5.6%. We see nominal GDP growth at ~7% in FY24 and expect it to improve to 9.3% in FY25.

* We broadly maintain our FY23 inflation projection at 6.6% but lower our FY24 forecast to 4.3% from 5.2% and expect FY25 inflation to print below 5% as well. Therefore, we continue to believe that the rate hike cycle is close to an end, with the terminal repo rate likely to be at 6.5-6.75%. We expect a 25bp hike in Feb’23, which may or may not be followed by another 25bp hike in Apr’23. We see the RBI keeping rates unchanged in the rest of CY23.

* India’s external situation has worsened in FY23, but the worst is already behind us. We expect CAD to widen to 3.6% of GDP in FY23 before easing to ~2% of GDP in FY24 and FY25. Nevertheless, with an expected US recession in 1HCY23, we expect INR to cross 85/USD by mid-CY23 before retreating in 2HCY23.

Changes in economic forecasts since Sep’22

Real GDP growth: With 6.3% YoY real GDP growth in 2QFY23, the market consensus has been broadly intact in FY23 at 6.9%. For FY24, while we have downgraded our growth forecast to 5.2% (from 5.5%), the market has kept it at ~6%. We see 5.6% real growth in FY25.

CPI inflation and interest rates: We have retained our FY23 inflation forecast at 6.6% but have cut the FY24 forecast to 4.3% (from 5.2%) and estimate FY25 inflation at ~5% as well. Accordingly, the terminal repo rate would also be higher than our previous forecast – expected at 6.5-6.75%.

External trade and INR: India’s CAD could rise toward 3.6% of GDP in FY23, before easing to ~2% in the next two years. However, since we expect the US economy to enter into a recession in 1HCY23, INR could easily cross 85/USD by mid-CY23. It may, however, retreat toward 84-85 by end-FY24.

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