Executive Summary

Market participants termed last month as "Mad March” given the sharp turbulence and volatility in the global markets. Global headwinds had started three years back with the rise of the Covid pandemic in Mar-20 and its domination throughout in CY20 and CY21, closely followed by the Ukraine geo-political crisis in CY22 and the subsequent global inflationary pressures that led to monetary tightening thereafter all over the world. The global inflation challenge which has its genesis in the Covid-Ukraine induced supply chain crisis as well as in the excessively liberal fiscal and monetary policies adopted worldwide thereafter, refuses to subside in a hurry despite strong doses of rate hikes and quantitative tightening by all the key central banks in the world. The sharp i.e almost 5% hike in the interest rates in US and the consequent drop in bond prices have already impacted the banking sector, particularly those with higher ALM risks. The Federal Reserve has to come to the rescue of the distressed regional banks and provide backstop insurance to some of the outstanding deposits. Nevertheless, the contagion risks clearly exist and has already shown its impact in Europe, where a vulnerable Credit Suisse had to be hastily merged with UBS with the blessings of Swiss National Bank. Despite such turbulence in the banking sector, three major central banks – Fed, ECB and BoE have already hiked rates in Mar-23 and not provided any clear indication that they are close to a pivot.

Clearly, such a treacherous and murky global economic landscape doesn’t promise an auspicious start to the new fiscal for India. In our opinion, the theme of "higher for longer” is set to play out even in India for both retail inflation and interest rates. Not just the headline CPI inflation which saw a fresh spurt to around 6.5% in Jan-Feb’23 due to a cereal induced fresh bout of food inflation but core inflation also continues to be well entrenched at over 6%. In our opinion, a 25 bps hike in April is on the cards and it may also be a challenge for the MPC to announce a "pause” given the current environment.

Such persistent headwinds notwithstanding, the resilience in the domestic economy is reflected in the latest Feb-23 print of Acuité Macroeconomic Performance index (AMEP index) that saw a YoY growth of 5.9% and 2.0% MoM. The moderate momentum witnessed in Q4 is likely to ensure an overall GDP growth of near 7.0% in FY23.

Going ahead into FY24, public sector capital expenditure will stand as a key pillar of India’s medium term growth story. Union Budget 2023 has hiked the overall budget for capital expenditure sharply to Rs. 10 Lakh Cr. While Indian merchandise exports will continue to face the heat, the current strength in services exports offer comfort. Among the other risk factors, pace of private capex recovery may remain sluggish amidst global uncertainties and with the access to funding particularly overseas funding more challenging. Urban consumption, which is still performing relatively better, may show some fatigue (especially for goods) as pent-up demand wanes and transmission of cumulative past rate hikes by RBI is completed. We expect a recovery in rural demand post the Rabi season; for now, we can hope the "El Nino” factor will not be significant enough to disrupt the consistency of the monsoon and the moderating trajectory of the inflation chart. India should be in a position to notch up a 6% GDP growth in FY24 despite the "higher for longer” phenomenon if weather gods are supportive.

Suman Chowdhury
Chief Analytical Officer, Acuité Ratings & Research