We downgrade our growth forecast from 7.1% to 6.4%: Standard Chartered Bank's head of India Economic Research

Expert view: Anubhuti Sahay, Head- India Economic Research at Standard Chartered Bank, believes elevated crude oil prices will drag Indian economic growth momentum.

"We downgraded our growth forecast from 7.1% to 6.4% assuming an average crude price of $90 per barrel," Sahay said in an interview with Mint.

Sahay said elevated oil prices and adverse monsoon may deteriorate Indian growth and inflation dynamics, even though a good starting point on both provides some buffer. Edited excerpts:

How has the ongoing West Asian conflict altered the outlook for the Indian economy? Do you believe India's growth momentum will see a major blow due to the US-Iran war and the resulting crude oil price hike?

The impact of the ongoing Middle East conflict on India's FY27 GDP growth would depend on the duration and the aftermath of the conflict.

Given the ongoing conflict, we downgraded our growth forecast from 7.1% to 6.4%, assuming an average crude price of $90 per barrel.

The adverse impact is already evident in high-frequency indicators such as new project announcements, cargo arrivals, increased input costs for corporates, reduced consumption of cooking gas, etc.

While a few sectors have held up well (electricity, steel, bank credit growth, etc.), the adverse impact on growth, especially on the informal sector, is likely to be more evident when the GDP data is released by the end of this month.

If crude prices remain above our assumption, GDP growth is likely to be even lower than our forecast, due to both price effects and supply disruptions.

This year, the monsoon may remain weak, as per forecasts. Poor rains, along with higher energy and fertiliser prices, may drive food inflation up. Is it going to be a year of higher inflation and lower growth for India?

Inadequate monsoon adversely impacts both growth and inflation. However, the sensitivity of the economy to an inadequate monsoon depends on factors such as the strength of the economy, global growth, and commodity prices.

As oil prices are already elevated and there are risks of a slowdown in global growth, the impact of an adverse monsoon on growth is likely to be higher.

Similarly, inflation is likely to be higher than our projection of 4.7% if inadequate monsoons push food inflation higher amid already elevated energy prices.

Having said that, we don’t see inflation moving above the upper bound of the mandated threshold for MPC on headline CPI inflation.

Overall, elevated oil prices and adverse monsoon (if it happens) will lead to deterioration of Indian growth and inflation dynamics, though a good starting point on both provides some buffer.

What could be RBI's next move on the monetary policy front? Should we be ready for a prolonged period of elevated interest rates? Is there a chance of a rate hike also?

Given risks to global and domestic growth amid supply disruption and elevated energy prices, central banks, including the RBI, are likely to prefer to support growth. 

However, any potential collapse in real rates and likely spillover of a weaker Indian rupee on inflation expectations raises the risk of a 25-50 bps rate hike by the RBI. 

While our base case is one of no change in repo rate, with an unresolved Middle East crisis and likely El Niño year, risks of a hike are increasing.

Despite several government efforts, the consumption cycle has not picked up in the country as expected. What could be the reason? What more can the government do to revive the consumption cycle?

Low-income growth (3-4% in real terms) and employment creation in low-productivity areas are key constraints to consumption growth. 

Hence, urgent measures are required to create high-quality employment by focusing on ease of doing business, skilling and a consistent policy framework to raise return on Indian assets for the right global capital allocation.

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