UBS slashes FY22 GDP forecast to 9.1%

Citing the massive surge in Omicron infections and the resultant impact on overall economic activities in the March quarter, Swiss brokerage UBS Securities has revised downwards its India's growth forecast for the current financial year to 9.1 per cent from 9.5 per cent earlier.

However, UBS Securities does not see the third wave impact extending to the next financial year as it has revised upwards its real GDP forecast to 8.2 per cent, up from 7.7 per cent earlier, expecting the real GDP growth to remain well above the historical average.

The World Bank pegs it at 8.3 per cent, unchanged from its June assessment, saying the recovery is not broad-based yet.

UBS' estimate is close to the official NSO forecast released last week at 9.2 per cent but 40 bps lower than the Reserve Bank of India's (RBI) latest forecast of 9.5 per cent announced in the December policy meet, while consensus varies from 8.5 to 9.5 per cent now.

The country has been reporting a massive surge in the coronavirus infections led by Omicron, the new variant of the virus, which has risen to the highest level in the past 211 days to 1,94,720 new cases.

It takes the total tally to 3,60,70,510, including 4,868 cases of the Omicron variant.

The number of active cases has increased to 955,319, the highest in 211 days, while the death toll has climbed to 484,655 with 442 fresh fatalities, showed the Union health ministry data.

Of the total 4,868 cases of the Omicron variant, 1,805 people have recovered or migrated so far. The maximum new caseload has come from Maharashtra, which is the largest state in terms of GDP share with 1,281 cases, followed by Rajasthan at 645, Delhi 546, Karnataka 479 and Kerala 350.

"Given the surge in Omicron infections and the resultant impact on economic activities, especially a delayed recovery in contact-intensive services and consumption sectors in the ongoing quarter, we see the real GDP growth slowing to 9.1 per cent from our previous forecast of 9.5 per cent," Tanvee Gupta-Jain, chief economist at UBS Securities India, said on Wednesday.

However, going forward, she expects the real GDP growth to remain well above the historical average at 8.2 per cent in FY23, up from their previous forecast of 7.7 per cent and a tad over the consensus estimate of 7.6 per cent before settling at the trend rate of six per cent in FY24.

She based the optimism on two counts: Given that the potential real GDP growth has already been stabilised at around 6 per cent now despite the pandemic and capex (capital expenditure), manufacturing and exports, and digitalisation should be the next key growth drivers beyond FY22.

But, she said that even though the country should remain one of the fastest-growing emerging markets (EMs) in FY23, the output gap may continue to be negative.

Gupta-Jain also flagged concerns on the still tepid credit growth saying a favourable combination of policy settings, lack of excesses and structural space for increased leverage should help boost the credit impulse, which it sees picking up to 10 per cent in FY23, 1.5 percentage points higher than the 2016-20 average and plunging to a six-decadal low of 5.3 per cent in FY19 and FY20.

On the retail inflation, she said upside risks to inflation still exist and pencils it at 5 per cent for FY23.

The only mitigating factors are negative output gap, stabilising global commodity prices, including oil, and easing supply chain bottlenecks.

Gupta-Jain said the RBI is faced with a tough choice amid rising inflation, widening current account deficit, a hawkish Fed and surging pandemic cases.

Accordingly, she sees the RBI turning off the liquidity tap and moving towards policy normalisation from April and raising the repo rates by 50 bps in the second half of FY23 provided that the economy regains its momentum.

She also sees the rupee facing depreciation pressure from the upcoming Fed rate hikes, current account balance deterioration and equity outflows amid demanding Nifty valuations.

If the bond index inclusion does not happen in 2022 or oil prices go past the $100 per barrel, the rupee could fall to 78 to a dollar.

Photograph: Anushree Fadnavis/Reuters