DBS has revised India’s FY23 growth forecast upwards to 7 per cent year-on-year (y-o-y) (CY2022 6.5 per cent) from 6 per cent earlier.
The Singapore-based Bank’s economic research team observed that the 7 per cent y-o-y growth rate in FY23 will be amongst the fastest in its Asia-10 universe.
The MNC bank maintained India’s full-year FY22 forecast at 9.5 per cent y-o-y. It noted that with a receding Covid case count, India’s recovery is turning more broad-based.
The DBS team assessed that into FY23, beyond the thrust from reopening gains, precautionary savings and sectoral normalisation to pre-pandemic levels, capex generation is likely to be the next driver in raising and maintaining growth on a higher plane.
“With the government needed at the wheel in the initial phase, we expect the private sector to participate thereafter when ongoing deleveraging is complete. State elections are lined-up ahead, majority of within H122,” said DBS’ economic research team comprising Radhika Rao, Senior Economist; Philip Wee, Senior FX Strategist; and Eugene Leow, Senior Rates Strategist.
Mapping the monetary policy exit strategy
In their report, “India 2022 Outlook: Shifting to a higher gear”, the DBS economic research team assessed that inflation is likely to quicken into late-2021 and Q122 towards 6 per cent owing to a passthrough of higher input prices, imported energy costs, narrowing output gap and seasonal bouts of food/perishables.
Average inflation is likely to stay above the 4 per cent midpoint target for a third consecutive year in FY22, with DBS’ forecast at 5.4 per cent y-o-y.
With growth expected to gain traction in FY23 and assuming firm commodity prices, the bank expects FY23 inflation to also average a firm 4.5 per cent y-o-y, overcoming a high base.
DBS said while on-track recovery and above-target inflation make a case for policy normalisation, authorities are likely to be watchful of the new risk on the horizon – the Omicron variant.
Notwithstanding the caution, the bank still expects a gradual exit from the ultra-accommodative policy settings to continue.
The move to conduct a longer-duration 28-day VRRR auctions is likely to be followed by a staggered increase in the reverse repo rate – by 20 basis points (each at the December 2021 and February 2022 rate reviews. One basis point is equal to one-hundredth of a percentage point.
The report said a change in the policy stance is likely within first half of 2022, likely to followed by the start of policy tightening by mid-2022 (50 basis points hikes), when inflation will hover above the mid-point of the target range.
