By Arsh Tushar Mogre
BENGALURU (Reuters) – India is likely to have seen strong double-digit economic growth in the last quarter, but economists polled by Reuters expected the pace to more than halve this quarter and slow further towards the end of the year as the interest rates rise.
Asia’s third-largest economy is struggling with persistently high unemployment and inflation, which has been above the top of the Reserve Bank of India’s tolerance limit all year and is expected to remain so for the remainder of 2022.
Growth is expected to decelerate sharply this quarter to 6.2% yoy from a median forecast of 15.2% in the second quarter, supported mainly by statistical comparisons to a year ago rather than new momentum, before continuing to slow down to 4.5% in October-December.
The median expectation for 2022 growth was 7.2%, according to an Aug. 22-26 poll by Reuters, but economists said the solid growth masks how quickly the economy is expected to slow in the coming months.
“Even if India remains the fastest growing major economy, domestic consumption may not be strong enough to drive growth further as unemployment remains high and real wages are at record lows,” said Kunal Kundu, India- economist at Societe Generale.
“By supporting growth through investment, the government has fired only one engine while forgetting the impetus provided by domestic consumption. This is why India’s growth is still below the pre-pandemic trend .”
The economy has not grown fast enough to accommodate some 12 million people annually.
Meanwhile, the RBI, a relative laggard in the global tightening cycle, will raise its key repo rate by another 60 basis points at the end of March to try to bring inflation within the tolerance limit. [ECILT/IN]
This follows three rate hikes this year totaling 140 basis points, and would bring the repo rate to 6.00% at the end of Q1 2023.
Although the central bank’s mandatory range is 2%-6%, inflation was expected to average 6.9% and 6.2% in the next quarter, respectively, before hitting just under in the first quarter of 2023. the top end of the range would drop to 5.8%. roughly in line with the central bank’s projection.
“Despite signs of a cooling down in price pressures… it is premature to slow down the fight against inflation given the significant uncertainties of geopolitical risks and hard landing risks in major economies,” said Radhika Rao, senior economist at DBS.
The economy is also facing inflationary pressures from a weak rupee, which has been trading for months close to $80 against the US dollar, a level the central bank is defending in foreign exchange markets by selling dollar reserves.
The latest Reuters poll also showed India’s current account deficit rose to 3.1% of gross domestic product this year, the highest in at least a decade, which could put further pressure on the currency.
(For other stories from Reuters’ global long-term economic outlook package polls 🙂
(Reporting by Arsh Tushar Mogre; poll by Anant Chandak, Devayani Sathyan and Vivek Mishra; editing by Hari Kishan, Ross Finley)
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