India: Strong 2Q growth to provide room for more hikes


Data out in late-August is likely to see 2Q22 (first quarter of FY23) GDP growth mark a strong jump from 1Q.
Group Research, Radhika Rao25 Aug 2022
  • India‚Äôs 2Q22 (first quarter of FY23) growth likely rose 16%yoy
  • Most lead indicators were up despite the Omicron wave, also helped by base effects
  • Resumption in service sector activity added to the momentum besides manufacturing
  • Impact of high commodity prices and heatwave will emerge as counterweights
  • Our FY23 forecast at 7%yoy will see India emerge as the fastest-growing economy in Asia this year
Photo credit: Unsplash Photo


For the full report with charts, please download the PDF file

GDP growth – preview

Data out in late-August is likely to see India’s 2Q22 (first quarter of FY23) GDP growth mark a strong jump from 1Q, based on most lead indicators. Base effects will also have an outsized impact, as activity in the comparative year ago period was adversely affected by onset of the Delta variant, which extracted significant economic (real GDP plunged -17% qoq nsa) and humanitarian costs. Notably, the high base of FY22 and low base of the year before has lent to significant swings in yoy growth between quarters.

The DBS GDP Nowcast model for India – which captures the trend based on statistically significant monthly data – points to double digit growth. We forecast 2Q22 (1QFY23) at 16% yoy from 4.1% in the previous quarter, better than consensus. GVA growth is seen at 14.5%.

Our weekly activity gauge has recovered sharply, marking a consistent uptrend despite the Omicron wave in early 2022. Broad-based improvement in vaccination rates and relaxation of lockdowns benefited urban consumption, particularly on the back of a resumption in service sector activity, including contact intensive entertainment venues, hospitality, domestic/ international travel, restaurants, theatres etc. Unemployment rates have returned to pre-pandemic levels, with wage growth also improving, even as the labour participation rate lags 2019 levels.

Rural consumption was mixed, especially non-farm activity which lagged the lift in urban demand. Farm incomes likely received a boost from the positive terms of trade.

Banks’ credit growth also rose in the period, whilst deposits accumulation slowed. On the fiscal math, higher spending needs from increase in subsidies, cuts in excise duties etc. were offset by higher revenue collections – direct and indirect. Government’s revenue expenditure ex interest payments rose 3.5% yoy from a fall in 1Q22 as well as comparable period year before.

On the investment end, lead indicators have been encouraging – which includes pick up in capacity utilisation rates that are back above its long-run average, coal and steel output, PMIs in expansionary terrain and higher capital goods output. Public capex is likely to be a bigger support in this cycle as private sector participation might be in the slow lane, due to rising input prices and renewed uncertainty over the global growth outlook.

Goods exports (INR terms) rose by a sharp 30%yoy in the Jun22 quarter but was outpaced by 56% rise in imports owing to higher commodity purchases, resulting in near doubling of the trade deficit. Drag from net exports is likely to be wider in the quarter. Unfavourable external environment/ exogenous forces will act as counterweights, including impact of the heatwave on farm output followed by uneven start to the monsoon, sharp rise in commodity prices impinging on corporate margins and an uncertain global environment.

In the rest of FY23, base effects will reverse from 3Q22 (2QFY23) onwards, which will take the quarter’s growth to sub-7% and moderate to sub-5% by end year. Encouragingly, commodity prices have corrected, including palm oil and crude, providing relief to the trade account, input prices and inflationary risks. We maintain our FY23 growth forecast at 7%yoy, which will see India emerge as the fastest-growing economy in Asia this year, in our coverage universe.

Strong growth to keep RBI focused on inflation

Minutes from the August policy meeting mirrored hawkish undertones of the policy decision (India policy: RBI frontloads hike, more to come) and reinforced our expectations that more hikes are in the offing. The stance of ‘withdrawal of accommodation’ suggests that benchmark rates are not yet at neutral levels, presumably one-two hikes away. Most members agreed that despite signs of a cool-off in price pressures due to correction in commodity prices, it was premature to go easy on the inflation fight given considerable uncertainties from geopolitical risks and hard landing risks in major economies. Resilience in domestic growth was a source of confidence for the members but spillover from global risks were under watch.

The MPC’s views on terminal rates falls in a broad 5.4-6.5% range, with our projection at 6.0% by Mar23. With 140bp worth tightening behind us, we look for 60bp more hikes in the repo rate within FY23. Our call is for 35bp hike in September followed by another 25bp in December to take the repo rate to 6.0%, before settling into an extended pause.  

Concurrently, there was some early signs of respite on capital flows. Foreign portfolio inflows into equities returned on a strong note in Aug with YTD US$5.7bn inflows after a small turnaround in Jul. Interests into debt were more modest at $0.22bn this month.

2Q22 gross FDI flows were also supportive at $22.3bn (net $16.1bn), marginally lower than 2Q21 at $23bn (net $17.2bn). On a related note, a press report suggested that US-based Apple might manufacture iPhone14 in India, in a bid to lower dependence on mainland China for its production needs as well as shorten the lag in manufacturing handsets, marking a boost to the economy’s electronics manufacturing sector as well as foreign flows. Notably Apple has already been manufacturing iPhones in India, starting with the SE mode in 2017 and iPhone13 earlier this year.

Offshore loans i.e., external commercial borrowings (ECBs) have however fallen by 25%yoy in Apr-Jun22. Tightening global liquidity and an increase in offshore borrowing costs likely impacted the appetite for external commercial borrowings after a rise in FY22, besides an under-pressure currency adding to costs. As part of steps to spur capital inflows, the ECB borrowing limit under automatic route was raised in July, which might have helped attract interest in 2QFY. Part of the financing needs might have been rechannelled to the domestic sources as bank credit growth quickened in the Jun quarter, with loans to the industry up 8.7% yoy, alongside farm and service sectors which also registered notable increases.

To read the full report, click here to Download the PDF

 

Radhika Rao

Senior Economist – Eurozone, India, Indonesia
radhikarao@dbs.com


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.