2 min read.Updated: 18 Jun 2021, 04:14 PM ISTLivemint
Although the GDP deflator is more closely linked with WPI, the policy instrument for the Reserve Bank of India is CPI. Therefore, while higher WPI-based inflation would drive nominal GDP growth higher, this would not present any additional concerns regarding the monetary policy
NEW DELHI: India’s real gross domestic product (GDP) this fiscal will likely grow at 8.7%, less than the 11.1% growth rate expected earlier , according to an EcoScope report from Motilal Oswal Financial Services Ltd (MOFS)
The downward revision comes in the wake of a ferocious second wave of the coronavirus pandemic that hit India hard during April-May, as per the report. The financial services firm has, however, revised upwards GDP growth estimates for FY23 to 5.4% now from 4% earlier.
“Compared with March 2021 forecast of 30% YoY, the firm now expects real GDP growth of 21% YoY in 1QFY22, with some downward revision in 2QFY22 as well. However, as covid-19 cases have dropped sharply in June 2021, some pent-up demand may be visible in 2HFY22 and 1HFY23. Consequently, while new projected real GDP growth is 8.7% for FY22, down from 11.1% expected earlier (in Mar’21), FY23 forecasts have been revised up to 5.4% now (from 4% earlier), MOFS said in a note.
The Indian economy began regaining momentum in June, ultra-high frequency data indicated, though subdued consumer sentiment is expected to limit the pace of recovery in Asia’s third largest economy. This comes as states gradually ease curbs on business activity, keeping in mind the decline in the number of fresh covid cases.
According to the report, the recent surge in industrial metals and agricultural commodities is likely to have a much larger impact on wholesale price index (WPI) than consumer price index (CPI).
“Although the GDP deflator is still more closely linked with WPI, the policy instrument for the Reserve Bank of India is CPI. Therefore, while higher WPI-based inflation would drive nominal GDP growth higher, this would not present any additional concerns regarding the monetary policy," MOFS said in the report.
CPI inflation is expected to ease to 5.7% in FY22 from 6.2% in FY21.
“Average inflation of 6% in two years reduces the possibility to ease any further. Therefore, MOFS expects the MPC to shift from the ‘accommodative’ stance to ‘neutral’ by the year-end," the financial services firm said.
On the forex front, MOFS expects rupee to remain weak in the near term and end the year at around 74.5 against the US dollar.
“The rupee has moved from over 75 in mid-April to 73 in the past few weeks. As India’s external situation remains extremely comfortable, higher inflation in the US may make the global markets jittery, creating a weakening bias in the rupee," MOFS said.
The financial services firm revised the dollar-rupee rate marginally upwards to an average of 73.8 for FY22.
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