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BENGALURU: Global rating agency Moody's Investors Service on Friday slashed India’s economic growth forecast for 2022 to 7%, from 7.7% estimated earlier, citing monetary policy tightening, higher inflation, uneven distribution of monsoon, and slowing global growth.

It expects the Reserve Bank of India (RBI) to increase repo rate by another 50 basis points to anchor inflation expectations and support the rupee exchange rate.

Moody's also lowered growth forecast for 2023 to 4.8% from 5.2% estimated earlier. Following the deceleration, the agency expects India's economic growth to recover to 6.4% in 2024.

"The downward revision assumes higher inflation, high interest rates and slowing global growth will dampen economic momentum by more than we had previously expected," said Moody’s in its Global Macro Outlook 2023-24.

The weakening of the rupee and high oil prices continue to exert upward pressures on inflation, which has remained above RBI's 2-6% target band for much of this year, said Moody's in the report titled global economy faces a reckoning over inflation, geopolitics, and policy trade-off.

From May to September, RBI raised repo rate by a cumulative 190 basis points (bps) to 5.9%--a three-year high--to contain inflation risks.

Annual headline CPI inflation rose to 7.5% in September from below 7.0% in July. Wholesale price inflation, however, has declined for four straight months, from a peak of 16.6% in May to 10.7% in September.

"We expect the RBI to raise the repo rate by another 50 bps or so as part of its objective to anchor inflation expectations and support the exchange rate. Eventually, the RBI will likely shift from inflation management to growth considerations, provided that the rate increases have the desired effect of taming inflationary pressures," said Moody's.

The ratings agency, however, said that India's underlying growth dynamics are fundamentally strong, boosted by a rebound in services activity.

"Government capital expenditure and manufacturing capacity utilization have also improved," it noted.

September exports were down from the peak in March, but still around 30% above the pre-pandemic level. Non-food credit growth shows solid momentum. The private sector, having deleveraged after the RBI's Asset Quality Review in 2015, is now well-positioned to increase capex spending. Also, Production Linked Incentive Scheme to attract investment in 14 key manufacturing sectors is showing results, it said.

"While these domestic strengths will continue to support the domestic growth narrative, global financial tightening and slowing external demand will pose downward pressure on growth in 2023," the report said.

ABOUT THE AUTHOR

Dilasha Seth

" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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