India’s strong recovery is steadily pacing with GDP expected to grow at 7.8% In FY23 and 7.2% in FY24

Consumption is expected to pick up in a broad-based manner from 1Q22 as vaccination rates cover the entire eligible population. Improvement in end demand (consumption and exports) can push capacity utilization rates higher, along with a conducive policy environment which could increase private capex from 2H22. Thus, GDP is expected to grow at 7.8% in FY 2023 and 7.2% in F2024

Headline CPI is expected to increase around 5.8%Y in QE March 2022 as the base effect dissipates and the trailing impact of higher commodity prices feeds in. However, inflation is expected to decelerate from there on account of easing commodity prices on a sequential basis. Thus, CPI inflation is expected to remain steady at 5% YoY in 2022. A persistent cost-push increase related to the supply side and/or a higher increase in demand which creates risks of generalized price pressures all lead to upside risks. Core PCE inflation was 3.9% YoY at the end of FY2021. While core PCE inflation continues at 2.4%Y in December 2022(2.3%Y in 4Q22), the path between now and then is meaningfully higher. Core PCE inflation begins to glide off of its peaks after February next year, 3 before slowing sequentially. By May, core PCE is forecasted at 2.9%Y,2.3%Y, and 2.2%Y on a 12-month,3-month, and 6-month annualized basis, respectively. In 2023, core PCE inflation would moderate further to 2.0%Y by year-end.

The next step in policy normalization following calibrated management of excess liquidity would be narrowing of the policy rate corridor to pre-pandemic levels through a reverse repo hike (15-20bp) in the December and February policy reviews. In a bid to create a business-friendly environment, policymakers have initiated several structural and institutional reforms.

 In addition to the measures taken over the last few years with the implementation of Goods and Services Tax, the Insolvency and Bankruptcy Code, and an inflation-targeting framework include approval of production-linked incentive schemes for all 13sectors, abolition of the retrospective tax on indirect transfer of assets, the national infrastructure pipeline, national monetization pipeline, etc.
Further, with growth recovery gaining traction, it is anticipated that the RBI will hike the repo rate in 1Q22 in base case. It is expected that the RBI will follow up with rate hikes (25bp) in each of the subsequent meetings in 2022. Risks to a delayed start hinge on the pace of growth recovery. The improvement in growth in gross tax collection has been marked by the onset of economic normalcy from pandemic blows. In this regard, it is expected that the fiscal deficit is to be in line with the government's estimate of 6.8% of GDP, as higher tax revenues could provide some offset to potentially lower divestment receipts and loss of revenue from recent fuel tax cuts.

Risks are expected to emanate from management of Covid, the pace of reaching full vaccination for the adult population, threats from new variants, and/or vaccine efficacy. Prolonged supply-side disruptions leading to a further surge in global commodity prices may accentuate upside risks to the inflation outlook, which may in turn impair growth projections. On the external front, apart from Covid-related disruptions, risks could emerge from a slowdown in global growth, and risk aversion in capital markets in response to faster-than-expected changes in global inflation and the monetary policy trajectory.