Moody’s retains India 2023 growth at 6.7% on strong domestic demand

New Delhi: Moody's Investor Services on Thursday retained India's economic growth at 6.7% for 2023, citing the country's remarkable resilience amid a global slowdown buoyed by solid domestic demand.

The rating agency, in its Global Macro Outlook 2024-25 report, said India along with other emerging market economies like Brazil, Mexico and Indonesia are well-positioned to capture a greater share of global trade flows due to the push from the West to diversify supply chains away from China amid geopolitical tensions.

"While India, Brazil, Mexico and Indonesia could emerge as engines of global growth, risks to growth forecasts for these countries are tilted to the upside," it said.

Moody's expects India's GDP (gross domestic product) to grow 6.7% in 2023, 6.1% in 2024 and 6.3% in 2025.

The Indian economy expanded 7.8% in the first quarter of the current fiscal (Q1FY24), up from 6.1% in the previous quarter on higher government spending, coupled with increased private capital expenditure and strong services growth.

A robust domestic demand, and manufacturing and services activity aided growth during the quarter.

"High-frequency indicators show that the economy's strong Q2 momentum carried into Q3. Robust goods and services tax collections, surging auto sales, rising consumer optimism and double-digit credit growth suggest urban consumption demand will likely remain resilient amid the ongoing festive season," the report said.

"However, rural demand, which has shown nascent signs of improvement, remains vulnerable to uneven monsoons that could lower crop yields and farm income," it added.

Moody's expects India's exports to remain weak against the backdrop of an unfavourable global economy, though strong domestic demand will likely sustain growth in the near term.

The International Monetary Fund (IMF) has also raised its 2023-24 growth projection for India, to 6.3% from its July estimate of 6.1%, citing stronger-than-expected consumption during Q1.

The Reserve Bank of India (RBI) estimates growth at 6.5% for FY24.

Meanwhile, Moody's expects advanced G20 economies to see a slower growth to 1% in 2024 from 1.7% in 2023, before rising to 1.8% in 2025.

The rating agency also expects growth in G20 emerging markets to slow to 3.7% in 2024 from 4.3% in 2023, followed by a 3.8% expansion in 2025.

"Headline and core inflation rates have retreated from 2022 peaks in advanced and EM (emerging market) economies," the report said. “We expect inflation to fall back to target in most G-20 economies by year-end 2025. Climate or geopolitical events could inject volatility from spikes in energy and food prices.”

The RBI has kept the repo rate unchanged at 6.5% since February.

Meanwhile, India's retail inflation eased to 5.02% in September on the back of softening food prices, having hit a 15-month high in July.

According to a Mint poll of 17 economists, India’s retail inflation likely cooled to 4.8% in October from 5% in September due to easing of food inflation.

The government is expected to release October's retail inflation data early next week.

Moody's expects the RBI to keep interest rates on hold till the US Federal Reserve takes a decision to cut rates.

Recently, the Fed left its policy rate unchanged in the 5.25%-5.50% range, though chair Jerome Powell left options open for another interest-rate hike.

"Ample reserves, solid domestic growth and largely contained inflationary pressures offer the central bank (RBI) maneuverability of monetary policy calibration," the Moody's report said.

However, given elevated external risks, the RBI is likely to keep interest rates high, it added.