Weak growth to hold RBI for long

“Increased crude oil prices will ultimately affect domestic consumption and purchasing power, which does not bode well for India’s economic growth. Therefore, for FY12, GDP growth may be lower than the official estimate of 8.9%,” said Madhavi Arora, principal economist at Emkay Global Financial Services.

There is also some relief in the case of Gross Value Added (GVA). GVA receives sector wise contribution. As Gaura Sengupta, India Economist at IDFC First Bank said, “Advance estimates imply that FY2012 GVA is just 3.1% above pre-pandemic levels with trade, hotels, transport and communications still remaining high. 10.9% below FY20 levels.” NSO’s advanced estimates for FY22, it said, “means that GDP growth will be just 1.8% higher than pre-pandemic levels (FY20), with continued policy support underscores the need”.

In short, growth has picked up in the last two years. In addition, the impact of the ongoing geopolitical tensions between Russia and Ukraine needs to be closely monitored. Brent crude oil prices are already hovering above $105 a barrel. India imports the bulk of its fuel requirements, and high prices stifle economic growth and adversely affect inflation.

This unfavorable combination of poor growth and high inflation also means that the Reserve Bank of India (RBI) may continue to focus on boosting growth rather than fighting inflation immediately. In its policy meeting held in February, the RBI maintained status quo on interest rates. The minutes of its meeting reveal that the RBI has decided to continue with the accommodative stance needed to revive and sustain growth on a sustainable basis as well as ensure that inflation remains within its target. Stay tuned. In other words, a weaker than expected December quarter (Q3FY22) GDP growth of 5.4% and a weak outlook could prompt the RBI to lean towards an accommodative policy in the long run till the recovery is at a stronger level.

“Against this background of slow growth, we expect monetary policy to remain accommodative. To adjust the policy space, RBI’s expectation has moderated CPI inflation to 4% target by FY23, Sengupta said.

“RBI has projected GDP growth of 6.6% year-on-year in Q4 (CY2021), thus this (GDP growth) reading may be viewed as a negative surprise and on the margins, and may add to the monetary policy committee’s Dovish narrative,” analysts at Nomura said in a report on March 1. That said, the brokerage expects the rate-hiking cycle to begin from June.

In the previous quarter, the contact-intensive sectors – trade, hotels and transport – had not yet fully recovered to pre-pandemic levels and were down 4.6% (Q3FY22 v/s Q3FY20). Analysts at Nomura commented on the sector, saying “its labor-intensive nature signals a broader economic crisis.”

In such a situation, economic growth is expected to decline sequentially in the March quarter. “The deceleration in the economic recovery will be led by the impact of omicron waves, especially in the contact-intensive services sector, which is a major component of India’s GDP. Supply-side shocks from the ongoing geopolitical crisis will impact inflation and trade in Q4FY22,” said Arora at Emkay Global.