On December 6, 2022, the World Bank revised its GDP growth forecast for India for 2022-23 to 6.9% from 6.5% on the back of strong economic performance in the second quarter. The World Bank went on to say that the nation is “well positioned” to weather potential global headwinds in 2023.
The Indian economy has shown remarkable resilience in the face of the deteriorating global situation due to strong macroeconomic fundamentals, which put it well ahead of other emerging economies.
Here’s a look at how the economy has performed through 2022, positioning India for growth in 2023.
2022 – The year in retrospect
There was no shortage of headwinds throughout the year, hampering India’s path to economic recovery. The year began with the threat of the Omicron variant of the coronavirus. Fortunately, the threat subsided fairly quickly without significantly affecting the economy. The only problem was that these headwinds gave way to the Russian invasion of Ukraine in mid-February, causing further disruptions in the global supply chain.
The next development to impact the economy was the decision by several major central banks, most notably the US Federal Reserve, to reverse their loose monetary policies. The domino effect of monetary tightening was felt around the world. The RBI did not tighten its stance too much either, announcing the first rate hike in May.
Some of the most important aspects of the economy that deserve special mention are:
Indian GDP
In the first half of the current fiscal year, India’s GDP recorded growth of 9.7% after 13.7% in the previous year. Gross value added (GVA) also increased, albeit below the level of the same period last year, namely by 9% compared to 12.8% growth in the previous year. GDP growth accelerated in the June final quarter, although falling short of RBI expectations, rising to 13.5%. This growth was supported by an increase in gross fixed capital formation and private consumption.
The quarter ended September saw some normalization, with GDP growth slowing to 6.3%, reflecting contraction in the mining and manufacturing sectors, as well as high inflation, falling exports and rising input prices.
inflation
Retail inflation, which is reflected in the CPI, stayed above the RBI’s upper tolerance level of 6% for 10 consecutive months through November, when it eased slightly to 5.88%. Retail inflation hit an eight-year high in April, with rural inflation rising to 8.4% and urban inflation to 7.1%.
The rise was attributed by analysts to a sharp rise in food inflation, which hit a 17-month high of 8.4% in April. This increase was due in large part to global increases in crude oil prices, which impacted not only food and commodity prices, but also communication and transportation costs.
rate hikes
Although RBI’s Monetary Policy Committee (MPC) left interest rates unchanged at 4% in April, it voted unanimously to raise the repo rate at its off-cycle meeting in May. As a result, the repo rate rose 40 basis points to 4.40%. The MPC has hiked rates at each of its three consecutive meetings this year, raising the repo rate by 50 basis points each time until the rate peaked at 5.9% in September.
Most recently in December, the RBI decided to moderate its rate hikes, raising the repo rate by 35 basis points to 6.25%.
The Indian stock market
It has been an eventful year for the Indian stock market. The first blow came from the Russia-Ukraine War, which caused the Sensex to plummet 2,702 points on February 24, the day Russia invaded Ukraine. But both Sensex and Nifty rallied fairly quickly, fueled by a better-than-expected first-quarter corporate earnings season, along with a slowdown in global commodity prices and domestic inflation.
Investor sentiment was also boosted by the return of FIIs to the Indian market, sending Sensex and Nifty to new highs. Amid rapid geopolitical and economic developments around the world, Sensex has seen over 1,000 rallies, with its largest daily gain coming on February 15 when it surged 1,736 points. On the other hand, the Sensex also saw major falls, with the index falling by at least 1,000 points at least 14 times in a single day over the course of the year.
Nifty, India’s economic leader, also remained volatile throughout the year, posting a gain of nearly 3%. While the big winners during the Covid-era, pharma and IT, did not fare well in 2022, the financials sector proved an outlier, with the Nifty Bank index up almost 18% at the end of December on rising interest rates, a recovery in credit demand and a strong Decrease in non-performing assets.
Outlook for 2023
According to a recent report from Morgan Stanley, the new year brings hopes of continued momentum in India’s growth story, helped by continued strength in domestic demand. In addition, the OECD is optimistic that India could become the second-fastest-growing economy among the G20 countries after Saudi Arabia in fiscal year 2022-23. This is expected despite a potential slowdown in global demand, inflationary pressures and ongoing monetary tightening.
Credit Suisse’s Global Equities Strategy team has upgraded India from “Underweight” to “Benchmark” for 2023 given the country’s underlying economic strength. Sectors expected to perform best include financial services, banks, insurance, capital goods, housing, defense, infrastructure and railroads.
However, investment decisions must not be based on hope. It’s important to continue to do your due diligence to make well-informed investments.
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