Although the recent spate of high-frequency data has raised hopes of a sustained economic recovery, experts see Asia’s third-largest economy facing headwinds from a slowing global growth and monetary tightening by its central bank.
India's manufacturing activity remains robust with the S&P Global Purchasing Managers' Index hitting an eight-month high of 56.4 percent in July, indicating that price pressure has started to cool off.
This was supported by other fundamentals recorded in July. The month saw passenger car sales jumping 16 percent, while goods and services tax revenue spiked to its second highest level of Rs 1.49 lakh crore. Eight core industries continued to average 12.7 percent in June.
While the domestic demand recovery that will ensure that growth remains reasonably robust, there are several countervailing risks going ahead, economists pointed out.
Fears of a crisis worsened with the Indian currency being battered in recent weeks amid the global risk-off, slipping below the key psychological level of 80 to a dollar. Since India runs a perennial trade deficit, this also adds to the inflationary pressure in the economy.
“While the Reserve Bank of India will strive to engineer a soft-landing for the economy, we think some growth sacrifice will be inevitable,” Rahul Bajoria, Barclays managing director and chief India economist, wrote in a note.
“A weakening global outlook, tightening domestic financial conditions and elevated energy costs could weigh on the recovery in the coming months. Spillovers from external weakness are visible in India’s new export orders, and this may dampen manufacturing sentiment in H2 2022,” he said.
The US Federal Reserve may continue to tighten the monetary policy despite conflicting economic signals and there is a renewed threat of a Chinese slowdown that may weigh on the overall growth. The International Monetary Fund last week cut its global growth forecast for 2022 by 40 basis points to 3.2 percent and by 70 basis points to 2.9 percent for 2023. The world could soon be on the brink of a recession, the agency warned.
While the Indian government has said that there is zero chance of a recession, the Reserve Bank of India’s tightening is expected to curb activities.
India’s central bank, which is meeting later this week, is widely expected to raise the key policy repo rate by at least 35 basis points as it seeks to curb inflation which has been hovering outside its tolerance ceiling for several months. Since early May, the central bank has increased the repo rate by 90 basis points to 4.9 percent.
The robust manufacturing PMI will give the RBI more confidence to hike by 50 basis points this week, despite signs that price pressure in the manufacturing sector is past its peak, Adam Hoyes, Assistant Economist at Capital Economics, said.
Inflation is still running far above the RBI mandate at 7.01 percent in June and food prices should still drive the headline CPI inflation higher in July. "What’s more, there is a risk that output price rises do not cool off if firms decide to pass on more of their higher input costs. And output prices in the services sector were on the rise in June,” Hoyes said.
Taking out the base effects from the latest core industries data shows that India’s industrial sector is entering a weaker phase, Capital Economics said in a separate note.
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