India: another solid year for the economy

robert kernel

India’s economy will grow by 6.7% in 2022, making it one of the fastest growing economies in Asia. India looks like she will achieve a similar growth rate in 2023. This is achieved despite the extremely difficult situation in the United States. Europe approaching recession or slowdown, and declining purchasing power due to rising inflation. another support budgetprovides the foundation for growth in 2023, including a significant increase in capital spending. The private sector will also provide additional impetus as private investment weathers higher interest rates and inflation is kept in check by the Reserve Bank of India.

Strong economic growth and its continuation

GDP slowed to 4.4% y/y in Q4 2022, down from 6.3% in Q3 and 13.2% in Q2.However, these The year-over-year numbers are extremely skewed by pandemic-related volatility in 2022 and should be treated with caution. Perhaps it would be better to focus on full-year 2022 growth. This represented a very strong growth of 6.7% from 2021. This is one of the fastest economic growth rates in Asia.

Private consumption and business investment drove economic growth in Q3 2022. Growth patterns in the fourth quarter show business investment still leading the way, but with less boost from consumer spending and less resistance from net exports.

Consumer spending slowed in the fourth quarter, but we believe spending in the country is likely to be a major force for growth in 2023 as inflation subsides and real spending power recovers. . However, we believe private investment will continue to be a strong source of economic growth, supported by additional capital spending measures outlined in the latest federal budget.

As a proxy for consumer spending, personal loan growth has been solid in recent months, rising to 23.7% y/y in January 2023. Loans for big-ticket items such as automobiles and consumer durables both grew strongly in this total, suggesting there is no shortage of consumer confidence, and education loans are growing well. Credit card borrowing is also on the rise, but not as much as personal loans overall.

Personal borrowing growth (YoY%)

Business investment supported by credit growth

The outlook for private sector investment also remains bright, despite the policy rate hikes the RBI has had to implement to keep inflation in check. To support private investment, the banking sector appears to be in decent shape despite the effects of the pandemic, with bad debt ratios declining across all major banking subgroups.

Expected commercial bank credit has grown strongly and, although the gross fixed capital formation series, which impacts GDP, is more volatile, all indications point to it growing strongly and this should continue as interest rates peak out and financial conditions become less restrictive.

Planned Commercial Bank Credit Growth and Fixed Capital Formation

Exports and balance of payments

India’s chronic trade deficit hit its worst in September 2022, but has moderated since then. Export growth has slowed, reflecting the external slowdown in economies such as the United States and Europe, but India has far less direct trade with China than many of its Asian counterparts, and the recent slowdown in China’s economy Not much affected by weakness. As a result, export growth was only about -6.5% year-on-year, much smaller than the 20% decline seen in countries such as South Korea, Taiwan and Singapore.

Falling international oil prices may also be having an impact here, but India has benefited from a significant drop in Russian oil prices. India’s imports from Russia are dominated by oil, and its dollar imports from Russia have increased over the past 12 months. Subtracting the value of these dollar imports from Russia by the price of Ural grade crude oil shows the extent of the increase in imports from Russia, which undoubtedly contributes to improving the trade deficit.

That said, it is clear that much of the improvement is coming through the non-oil portion of the trade deficit. And the main contributor to the improvement in trade positions has been a sharp slowdown in non-oil imports, down about 10% year-on-year in January.

Indian crude oil imports

government spending

The recently announced Federal Budget for 2023/24 also shows that government support for the economy will continue to provide a solid backdrop for the business sector, with strong infrastructure investment helping to “attract” additional business investment. There is a possibility.

Capital expenditures accounted for almost a quarter of the Indian government’s expenditure in the coming year with a total of INR 13,709 billion, a 30% increase over the previous year. Infrastructure projects will be the main beneficiaries of such spending.

budget figures

Budget finances are on track to improve, assuming growth projections are delivered as planned and spending is not overrun. However, the road to narrowing the deficit will be gradual, with a deficit of 6.4% in 2022-23 and a projected deficit of just under 6% in 2023-24.

If achieved, its deficit projections should keep the debt-to-GDP ratio on a downward trend, but after reaching almost 90% during the pandemic, India has not been very flexible, the rating agency confirms. I want to Continued progress in debt reduction if India maintains her BBB- ratings (Fitch and S&P) and Baa3 (Moody’s) all with a stable outlook.

India’s deficit and debt trends

Inflation and Monetary Policy

After falling below 6% in December and back within the RBI’s 4%+/-2% inflation target range, it recovered to 6.5% in January. With food making up almost half of his overall CPI basket, it’s no surprise that January’s sharp rise was due to this component. In particular, the decline in vegetable prices from the previous month narrowed slightly and wheat rose somewhat. price.

Contribution to year-over-year inflation (PP)

However, at the last RBI rate-setting meeting, the repo rate was raised another 25bps to 6.50%, maintaining the tightening bias, giving much more weight to core inflation than the headlines. Therefore, these volatile food price movements can be largely ignored for the time being. It’s unclear which specific core rate we need to focus on, but there’s nothing more obvious within the RBI’s target range, neither of which shows much signs of declining.

The last rate hike and maintenance of the tightening bias was by no means unanimous, as two of the six Executive Board members opposed it. However, given that core inflation remains high and the foreign currency setting has shifted to a ‘longer-term higher’ stance, we could see another 25bp tightening at the April meeting. higher, and we believe interest rates are likely to become more restrictive. 6.75% setting.

That said, we believe both headline and core inflation will fall in the coming quarters, so this not only marks a peak for India’s policy rate, but it could see rates cut by the end of the year. . .

Headline and Core Inflation

Currency and bond markets

The Indian Rupee (INR) is one of Asia Pacific’s worst-performing currencies in 2022, declining 10.24% against the United States Dollar (USD), just above the Japanese Yen’s 12.05% decline was. Meanwhile, the Thai baht and Vietnamese dong lost less than 4%.

The weakness in 2022 was at least partially due to the strength of the US dollar, and it wasn’t just the INR that weakened. However, its relative poor performance can be attributed to several factors.

1. The chronic trade deficit is now showing signs of easing.
2. In that, rising oil prices in early 2022 did not help. Given its high reliance on imported energy, the INR is one of the more energy-sensitive currencies in the region. We expect oil prices to rise again, especially in the second half of the year, but the impact should be limited by rising imports of Russian oil.
3. Easing by the RBI – The central bank is realistic about the need to raise policy rates during 2022, and only later this year has it shifted its policy balance away from both an inflation-focused and growth-supporting Inflation has shifted to a rebound.
4. The strength of the US dollar in general was a major factor driving the weakness in the INR. Now, the US dollar is strong again as hopes of a US pivot are dashed by a set of strong data. However, this period is over and a more neutral to weaker outlook for the US dollar could see some gains in the INR, but in the longer term, India’s inflation is likely to pick up, which is likely to result in a weaker US dollar. It may fall further. In the medium to long term, it is likely to be higher than the US inflation rate.
5. The Chinese yuan is likely to appreciate this year as China’s economy reopens, and other Asian currencies are likely to appreciate as well.

Yields on Indian local currency bonds surged in early 2022. Yields on 10-year government bonds rose from about 6.45% at the beginning of the year to a peak of 7.60% by mid-June, but have remained relatively stable since then, with yields now at about 7.40%, well below current inflation. provides approximately 1% of the real return on

Talk of inclusion in global bond indices has quieted down a bit since its implementation was delayed last year. In theory, this could happen this year, but with US Treasury markets a bit volatile right now and debt ceiling concerns behind the scenes, US inflation and interest rates should soften before this happens. When it becomes visible, it could be later this year. Expected capital inflow estimates range from $30bn to $40bn, which could have a noticeable supportive effect on both government securities and the INR. .

For the foreseeable future, we expect 10-year yields to remain in their current range through mid-year before slowly declining towards the end of the year.

summary forecast table

Content disclaimer

This publication has been prepared by ING for informational purposes only, without regard to the means, financial situation or investment objectives of any particular user. This information does not constitute an investment recommendation, nor is it an offer or solicitation of an investment, legal or tax advice, or to buy or sell any financial instrument.read more

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Editor’s note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.