Asia’s third-largest economy is struggling with persistently high unemployment and inflation, which exceeds the peak of the reserve
tolerance band all year and should do so for the rest of 2022.
Growth this quarter is expected to slow sharply to 6.2% year on year from a median forecast of 15.2% in the second quarter, supported mainly by statistical comparisons with the previous year rather than new momentum, before decelerate further to 4.5% in October-December.
The median growth expectation for 2022 was 7.2%, according to a Reuters poll from Aug. 22-26, but economists said the solid growth rate masks how quickly the economy is expected to slow in the coming months. come.
“Even if India remains the fastest growing major economy, domestic consumption may not be strong enough to further boost growth as unemployment remains high and real wages are at an all-time high,” he said. said Kunal Kundu, Indian economist at Societe Generale.
“By supporting growth through investment, the government has only fired on one engine while forgetting about the impetus given by domestic consumption. That is why India’s growth is still below its growth trend. ‘before the pandemic.
The economy has not grown fast enough to accommodate some 12 million people entering the labor force each year.
Meanwhile, the RBI, relatively lagging behind in the global tightening cycle, is expected to raise its policy rate another 60 basis points by the end of March in an attempt to bring inflation back within tolerance.
This follows three interest rate hikes this year totaling 140 basis points, and would take the repo rate to 6.00% by the end of Q1 2023.
While the central bank’s mandated target range is 2% to 6%, inflation is expected to average 6.9% and 6.2% this quarter and next, respectively, before falling just below l upper end of the range at 5.8% in the first quarter of 2023. This is roughly in line with the central bank’s projection.
“Despite signs that price pressures are easing (…), it is premature to go easy on the fight against inflation given the considerable uncertainties linked to geopolitical risks and the risks of a hard landing in major economies,” said Radhika Rao, senior economist at DBS.
The economy is also under inflationary pressure from a weak rupee, which has been trading for months at nearly 80 to the US dollar, a level the central bank has defended in foreign exchange markets by selling dollar reserves.
The latest Reuters poll also showed India’s current account deficit hitting 3.1% of gross domestic product this year, the highest in at least a decade, which could put further pressure on the currency.
