Why Moody’s cut India’s growth forecast for this year and next

by 5paisa Research Team Last Updated: 2022-03-18T10:03:04+05:30

International ratings firm Moody’s Investor Services has cut India’s near- and medium-term economic growth forecast as a surge in energy prices and constrained access to key commodities coupled with financial markets volatility increases risks for governments and companies.

Moody’s has lowered India's growth forecast by 40 basis points (bps) to 9.1% for 2022 and 10 bps to 5.4% for 2023, the agency said in its latest Global Macro Outlook report.

“The first half of 2022 will be challenging. Elevated commodity prices, demand-supply imbalances, inflation pressures, volatile financial markets and geopolitical tensions will make for a challenging backdrop,” said Moody’s.

The downward revision is in sharp contrast to its forecasts nearly three weeks ago when Moody’s had raised its 2022 growth forecast to 9.5% from 7%, and maintained its forecast at 5.5% for 2023.

“High gasoline and fertilizer costs would put a strain on government finances in the long run, perhaps reducing planned capital spending. As a result of all of these factors, we've decreased our growth predictions for India,” it said.

Moody’s said the effect of Russia’s invasion of Ukraine reverberates globally and has prompted it to re-evaluate its baseline macroeconomic assumptions and assess how evolving credit trends affect debt issuers and transactions in different sectors and regions.

The reduction in growth forecasts mirrors similar downgrades by various foreign securities and investment banking firms.

Last week, Swiss investment banking firm Credit Suisse said that rising oil prices hurts India’s current account while the economy remains sensitive to the potential rate hikes from the US Federal Reserve.

Crude oil prices surged to their highest level since 2008. Prices have been inching toward record levels in recent weeks on prospects of the US and European allies banning oil imports from Russia that would drastically curtail supplies from the market. 

Higher crude oil prices have a domino effect on inflation and the economy’s other metrics such as current account deficit, production and transport costs, and interest rates among others.

Moody’s also trimmed the growth forecast of G-20 economies to 3.6% in 2022 from 4.3% it envisioned in February. “Growth will further slow to 3% in 2023,” it said, adding that Russia was the only G-20 nation to see a contraction. 

Russia's economy is now expected to shrink 7% this year and 3% in 2023 as against a projected growth of 2.0% and 1.5%, respectively, before the invasion of Ukraine.

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