India may be less affected but it is not immune to external headwinds including slowing global growth and tightening of monetary policies, which may lead to a soft landing for Asia's third largest economy in the next fiscal year and hinder the economic growth pace, UBS India said today.
"Factoring in the delayed impact of monetary tightening on domestic demand, we continue to expect India's growth to remain below consensus in FY23 and FY24," Economist Tanvee Gupta Jain said in a research note. "In our base case, we expect India's real GDP growth to slow from 6.9% YoY in FY23E to 5.5% YoY in FY24E before settling at the long-run average of 6% in FY25E. This compares with consensus forecasts of 7% YoY growth for FY23 and 6.2% YoY for FY24."
To rein in the galloping inflation rates across the world, key central banks and India too had hiked rates in tandem.
India's Monetary Policy Committee has gone for cumulative 190 basis points of key policy rate hike since May, taking the repo rate to pre-Covid levels, while the Federal Reserve has opted for a steep 75 bps rate increase in each of the last four meetings that lifted borrowing costs in the world's largest economy to the highest since 2008.
"Slowing global growth and a tightening global monetary landscape on higher generalised inflation in advanced economies have been material headwinds for growth in emerging markets, and India is no exception," UBS said.
India is seeing elevated inflation, a deteriorating current account deficit (CAD) and a stretched fiscal position, UBS noted, adding that this poses a dilemma for India's policymakers on how to judiciously use monetary and fiscal policy tools to reduce growth downside risks while maintaining financial stability.
"We expect the RBI to choose the middle path: allow for orderly and gradual depreciation of the currency (FY23E year-end USDINR at 85) while keeping its policy stance in sync with global monetary tightening (repo rate peaking at 6.5% in this cycle)," UBS said.
As for New Delhi, UBS expects it to go slow on fiscal consolidation in FY24 to support growth by boosting capex along with welfare spending (especially in the run up to the 2024 parliamentary elections).
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