India’s GDP growth is forecast to lag from 6.9% in 2022 to 5.9% in 2023, according to Goldman Sachs.
Growth is expected to be “a tale of two halves in 2023”, with a slowdown in the first half as the reopening boost fades and monetary tightening weighs on domestic demand, Goldman Sachs said in its Macro Outlook 2023. In the second half, growth is expected to pick up as global growth recovers, the net export drag declines, and the investment cycle picks up.
The government is expected to continue its focus on capital spending, with signs of the nascent investment recovery continuing, the note said.
Retail inflation is forecasted at 6.1% in 2023, from 6.8% in 2022, as active government intervention is likely to cap food inflation. Core goods inflation has peaked, but upside risks to services inflation are likely to keep core inflation sticky at around 6% year-on-year, it said.
Given Goldman Sachs’ forecast for the Fed Funds rate to be 5-5.25% in 2023 and India’s real interest rate being negative, the RBI is likely to raise the repo rate by 50 basis points in December and by 35 basis points in February 2023 policy meetings, according to the note.
Indian policymakers are faced with a difficult situation of dealing with a hawkish Fed, rising domestic inflation, and widening twin deficits on both current account and fiscal balances amid slowing domestic growth, the report said.
To absorb these macro shocks, the RBI hiked policy rates, kicking off the tightening cycle with an off-cycle hike in May 2022. It also judiciously used parts of the forex reserves that it had accumulated from current account surpluses and capital flow during the pandemic, making the rupee one of the best performing currencies in the region, it said.