Indian GDP growth forecast for 2022 reduced to 7.7% from 8.8% by Moody’s; Know why

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Moody’s Investors Service slashed India’s GDP growth by 1.1 percentage points on Thursday, citing slower economic momentum over the coming quarters due to rising interest rates, uneven monsoon and slowing global growth. The sharp reduction has now lowered India’s GDP forecast to 7.7%, down from a previous forecast of 8.8% in May. It comes a day after data shared by the government showed India’s economy grew 13.5% year-on-year in the April-June quarter. However, economists said this expansion is likely to lose momentum in the coming quarters due to rising interest rates, among other reasons.

The Reserve Bank of India has raised repo rates by a total of 140 basis points since May, with a 50 basis point increase at its MPC meeting in August.

In its Global Macro Outlook 2022-23 update, Moody’s said India’s central bank should remain hawkish this year and maintain reasonably tight policy in 2023 to prevent domestic inflationary pressures from building further.

Inflation remains a challenge, with the RBI needing to balance growth and inflation, while containing the impact of imported inflation from the year-to-date depreciation of the Indian rupee against the US dollar by around 7% .

“Although inflation eased slightly to 6.7% in July, it remains above the central bank’s target range of 2% to 6% for the seventh consecutive month. The RBI expects the inflation rate to remain high until 2023, at 5.8% from January to March and 5.0% from April to May. In August, the RBI raised the key repo rate for the third time by 50 basis points to 5.4%. The central bank is expected to remain hawkish this year and maintain a reasonably tight policy in 2023 to prevent domestic inflationary pressures from building further.

A faster decline in global commodity prices would provide a significant boost to growth. In addition, economic growth would be stronger than projected for 2023 if the private sector investment cycle were to accelerate, he added. Although inflation eased slightly to 6.7% in July, it remains above the central bank’s target range of 2-6% for the seventh consecutive month.

India’s economic growth before the COVID-19 shock had slowed significantly due to the impact of corporate sector deleveraging on business investment, he said. “With deleveraging complete, business sector investment is showing early signs of a recovery, which could support a continued expansion of the business cycle for several quarters, supported by investment-friendly government policies and rapid digitalization. economy,” Moody’s added.

On the downgrade to growth forecasts, Moody’s said the outlook continues to weaken, especially as financial conditions have tightened following central bank actions to rein in persistent inflation. . Our revised projections reflect the significant deterioration in the outlook for several major economies since the start of the year. After GDP growth of 5.9% in 2021, we now expect growth in G-20 economies to slow to 2.5% in 2022 and then to 2.1% in 2023, he said.

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