As a tumultuous year comes to an end, the big question is whether the economy will reflect much of the optimism that we are seeing in the equity markets? Fortunately, there are ample signs that the worst is about to be over, but in the coming year at best we could still see a prolonged phase of consolidation.
The Indian economy has been demonstrating fine resilience in the last few months despite the accentuated global headwinds due to the Ukraine-Russia conflict, protracted geo-political situation, tightening financial markets, and the squeeze in global demand dynamics.
Last fortnight’s GDP numbers came in at 6.3% in Q2FY23, marginally higher than Bloomberg consensus estimates. Nominal GDP grew by 16.2% yoy.
There were some more bright spots in the economy during the quarter. Agriculture grew by 4.6% yoy, better than market expectations. Services sector also did a steady quarter with a 9% yoy growth print, but this was just a shade under market expectations. The financial, real estate and professional sector sub-segments marginally underperformed. However, growth in trade, hotels, construction, defence and other sectors showed good resilience.
One upbeat takeaway for the record is that most sectors have grown above pre-pandemic levels, however, some like the hotels and transport sector still remain below these levels.
Private sector consumption has been relatively robust at 9.7% yoy, which means we are well-placed as far as many of the consumption related sectors are concerned. The ripples of rising consumption will infuse additional strength into the Indian economy in 2023.
The most obvious spoke on the economic wheel continues to be inflation. Global economies are facing a cost-of-living crisis that is hurting global growth. In their quest to fight inflation, global central bankers have been raising interest rates aggressively in the recent past.
Hence, all eyes will be on how inflation both in domestic and global economies play out. On that note, October’s inflation report, however, offered some encouraging signs that pricing pressures are beginning to ease. The recent CPI print moderated to a 3-month low of 6.8% yoy in October from the 7.4% yoy print in September.
While this is good news, the RBI still cannot let off its guard. Inflation is still well-above the RBI’s comfort level and remains on sticky ground due to the global financial tightening cycle and high commodity prices. The RBI has maintained that the battle against inflation is not over yet. The CPI still continues to remain above the target level in the country.
Overcoming the slack
On that count, the RBI keeping its options open on interest rate hikes indicates that the battle against inflation is not yet over. The Governor also said that uncertainty prevails on the terminal Fed funds rate, which is another reason why it would want to retain some optionality on rate hikes in the coming months.
The US Fed on its part slowed the pace of interest rate hikes last time from an expected 75 basis- points to 50 basis points. At its next policy meeting, a reduction in the US Fed pace of increase gives the RBI the further flexibility and window to slacken its own pace of rate increases.
But the financial tightening will weigh on economic sentiment for now and the early part of 2023. The RBI has cut the GDP forecasts from FY23 to 6.8% from the 7% earlier in the latest monetary policy due to this backdrop. GDP growth expectations for Q3 and Q4FY23 have also been lowered and are now estimated at 4.4% (4.6% earlier) and 4.2% (4.6% earlier).
India’s a bright spot
Fortunately, in India some of the broad macro-indicators remain healthy which includes corporate balance sheets. Consumer spending is helping cushion the weakness in some core sectors, however, factors like automobile sales and consumer durables sales are buoyant. Overall, in the global economy if the price pressures and commodity prices ease, the rate hike narrative that is roiling the world economy will lose its vigour. Much of that good cheer will also reflect in the domestic economy.
The equity markets also seem to be ignoring the global challenges considering that it is defying all the negative factors of inflation and slowing economic growth. In fact, stock market indicators have scaled new all-time highs in the past month. Foreign investors have started to see India’s resilient economy as a more attractive destination despite the less attractive carry trades due to high interest rates. Consider it another way, the markets are not flagging anything seriously negative with the Indian economy.
This is happening at a time when some advanced economies face the prospect of a mild recession, due to higher costs of living, and rising inflation. So India will be lifting a lot of pressure from the global economy and offsetting global weakness with its expectedly better GDP rates in the coming year. When one steps back and assesses the economy in light of global conditions, India’s multiple strengths become more apparent.
In fact, India’s economy will be cynosure of all eyes in the coming years, and that India’s position as an important global asset class for foreign capital will not be ignored anymore.