Indian economy most vulnerable among emerging markets in Asia, says Societe Generale

India’s inflation gap—the central bank’s inflation target minus core retail inflation—is seen at negative 2.4 percentage points, while its output gap since the start of the pandemic is seen at 11.7 percent, the analysts said.

The country’s current account deficit is projected at 2.9 percent of the gross domestic product for 2022 and the general government fiscal deficit is seen at 9.9 percent of gross domestic product.

In an interview to Moneycontrol earlier this month, Kundu had highlighted that India’s growth prospects had taken a hit due to the consistent stress faced by the so-called micro, small and medium enterprises and the weak recovery in domestic demand.

Kundu said in the latest note that while inflation may have peaked, the slow pace of easing would continue to hinder the recovery, which would also face headwinds from a struggling domestic demand, weak currency and a weakening current account deficit.

The house expects the Reserve Bank of India to remain aggressive in the short term, with an estimated 85 basis points of rate hikes at the next two meetings.

Cooling commodity prices and a high base effect, however, could cap the policy repo rate at 5.75 percent as inflation starts easing and the RBI refocuses on growth, the note said.