1. Omicron: Near-term downside risks to growth?
India's 3rd COVID-19 wave has set in, with a sharp rise in new cases. Building in tightening mobility restrictions (still lower than earlier waves, aided by vaccine roll-out) & a delayed recovery in contact-intensive services consumption in the March 2022 quarter, we now expect India's real GDP growth of 9.1%YoY in FY22E (previously: 9.5%).
2. How will India's growth pan out in 2022-23E?
We expect India's real GDP growth to remain well above the historical average, at 8.2% YoY in FY23E (previously: 7.7%; consensus: 7.6%) before settling at the trend rate of 6% in FY24E. Even though India should remain one of the fastest growing Emerging Market in FY23E (on a strong statistical carry-over effect), the output gap may continue to be negative.
3. Will the credit cycle turn and give India's growth a boost?
A favourable combination of policy settings, a lack of excesses and structural space for increased leverage should help boost the credit impulse. 蜜豆视频's India banking team estimates system credit growth of 10% YoY in FY23E, 1.5ppt higher than 2016-20 avg.
4. Will Inflation remain elevated?
Upside risks to inflation exist (5% for FY23E), in our view, but mitigating factors in FY23E still include negative output gap, stabilising global commodity prices (including oil) and easing supply chain bottlenecks.
5. How much will India's policy rates rise this cycle?
RBI faces a tough choice amid rising inflation, widening Current Account (CA) deficit, a hawkish Fed & surging COVID-19 cases. We expect broadening in policy normalisation from April policy & a 50bp policy (repo) rate hike in H2 FY23E once economic growth gains momentum.
6. How is India's potential growth faring? What are the new growth drivers?
We maintain our view that India's potential real GDP growth has stabilised, at around 6% currently, despite the pandemic. Beyond FY22E, we believe capex, manufacturing and exports, and digitalisation could be the next key growth drivers.
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FX and rates strategy: Higher yields, weaker INR
The RBI's policy normalisation, higher US yields (rise in real yields of 100bp in 2022E), and credit/investment growth recovery will likely send 10-year Indian government bond (IGB) yields higher in FY23E, to 6.75%. However, these upside pressures will likely partially be offset by potential bond index inclusion. INR faces depreciation pressure from the upcoming Fed rate hikes, CA balance deterioration and equity outflows amid demanding Nifty valuations. If the bond index inclusion does not occur in 2022E or oil prices rise to US$100/bbl, USD/INR could trade beyond the pandemic highs, to 78.
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