UBS cuts India’s GDP estimates for FY23 by 70 bps

In a significant move, the Union Bank of Switzerland (UBS), one of the world’s largest investment banks, has lowered India’s GDP growth forecast for FY23. That is hardly surprising because in the latest monetary policy, the RBI has also reduced the growth estimates and hiked the inflation estimates for FY23.

According to UBS, India is likely to feel the pain of global commodity prices and the persistent effort by the Fed to tighten the existing financial conditions. This is likely to impact economic activity.

So, what exactly is the extent of the downgrade by UBS? In fact, UBS has downsized its GDP growth forecast for India for FY23 by 70 basis points from 7.7% to 7%.

The risks become elevated due to the possibility that the RBI may not be able to maintain inflation targets for the year due to stress on prices from factors beyond control. The Russian invasion of Ukraine has only exacerbated matters for the Indian economy with supply chain constraints.

UBS is of the view that high global commodity prices and slower GDP growth will combine to hit domestic demand, consumption and income levels. There is also the distinct risk of the central government diverting money from capex towards subsidies that are frowned upon by reformists.

UBS has also pointed out that in this round, the strain on rural India is much more due to rampant high inflation in rural areas and the fall in consumption and income.
 

UBS also feels that going ahead, the passthrough of higher commodity prices would be a lot more seamless. This will add to pricing pressure and demand constriction for everything from oil to fuel to food items.

UBS expects urban / rural consumption as well as the company operating margins to feel the pain in the quarter. Inflation at 6.95% in the Mar-22 month is also an indication that a lot of purchasing power will be robbed by the system.

UBS also expects that the RBI would follow the Fed if the latter maintains its aggression beyond May 2022. UBS expects that RBI would be more aggressive to factor in the delay and end up raising as much as 100 bps in the current calendar year itself.

That, according to UBS, would crimp domestic consumption, spending power and income levels. It could also amplify the global problems and push growth to possibly lower levels in India.