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By Arsh Tushar Mogre
BENGALURU (Reuters) – India likely posted strong double-digit economic growth in the last quarter but economists polled by Reuters expect the pace to more than halve this quarter and slow further towards the end of the year as interest rates rise.
Asia’s third-largest economy is grappling with persistently high unemployment and inflation, which has been running above the Central Bank of India’s tolerance limit throughout the year and will continue into 2022.
Growth this quarter is expected to slow sharply to 6.2% y/y from a median forecast of 15.2% in Q2, supported mainly by statistical comparisons with last year rather than recent momentum, before slowing further to 4.5% in October-December.
The median expectation for 2022 growth is 7.2%, according to a Reuters poll of Aug. 22-26, but economists say the solid growth rate masks how fast the economy is expected to slow in the coming months.
“Even as India remains the fastest growing major economy, domestic consumption may not be strong enough to drive further growth as unemployment remains high and real wages are at record lows,” said Kunal Kundu, India economist at Societe Generale.
“By supporting growth through investment, the government is only starting one engine while forgetting the boost provided by domestic consumption. This is why India’s growth is still below the pre-pandemic trend.”
The economy has not grown fast enough to accommodate the approximately 12 million people who join the workforce each year.
Meanwhile the RBI, which has been relatively sluggish in its global tightening cycle, will raise its main repo rate by another 60 basis points by the end of March to try to bring inflation within tolerable limits. [ECILT/IN]
That follows three rate hikes this year for a total of 140 basis points, and will bring the repo rate to 6.00% by the end of Q1 2023.
While the central bank’s mandated target band is 2%-6%, inflation is forecast to average 6.9% and 6.2% in this and next quarter, before falling just below its high range to 5.8% in Q1 2023. This means that it is roughly in line with the central bank’s projections.
“While there are signs of easing price pressures … it is too early to ease the inflation war given the considerable uncertainty from geopolitical risks and the risk of a hard landing in major economies,” said Radhika Rao, senior economist at DBS.
The economy is also cushioning inflationary pressure from a weak rupee, which for months has traded close to 80 dollars, a level the central bank maintains in currency markets by selling dollar reserves.
The latest Reuters poll also showed India’s current account deficit swelled to 3.1% of gross domestic product this year, the highest in at least a decade, which could put further pressure on the currency.
(For another story from Reuters’ global long-term economic outlook poll pack 🙂
(Reporting by Arsh Tushar Mogre; Polling by Anant Chandak, Devayani Sathyan and Vivek Mishra; Editing by Hari Kishan, Ross Finley)
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