Moody's cuts India's growth forecast to 7.3% from 7.5% on higher oil prices

Moody's Investors Service on Wednesday cut India's 2018 growth forecast to 7.3 per cent from the previous estimate of 7.5 per cent, saying the economy is in cyclical recovery but higher oil prices and tighter financial conditions will weigh on the pace of acceleration.

Moody's, however, maintained its 2019 growth forecast at 7.5 per cent.

"The Indian economy is in cyclical recovery led by both investment and consumption. However, higher oil prices and tighter financial conditions will weigh on the pace of acceleration.

"We expect GDP growth of about 7.3 per cent in 2018, down from our previous forecast of 7.5 per cent. Our growth expectation for 2019 remains unchanged at 7.5 per cent," it said in an update of its 'Global Macro Outlook: 2018-19'.

Moody's said growth should benefit from an acceleration in rural consumption, supported by higher minimum support prices and a normal monsoon.

"The private investment cycle will continue to make a gradual recovery, as twin balance-sheet issues - impaired assets at banks and corporates - slowly get addressed through deleveraging and the application of the Insolvency and Bankruptcy Code," it said.

Also, the ongoing transition to the new Goods and Service Tax regime could weigh on growth somewhat over the next few quarters, which poses some downside risk to the forecast, it said. "However, we expect these issues to moderate over the course of the year."

For the world economy, Moody's expected 2018 to be a year of robust global growth, similar to 2017.

"However, global growth will likely moderate by the end of 2018 and in 2019 as a result of a number of advanced economies reaching full employment, and because of rising borrowing costs and tighter credit conditions in both advanced and emerging market countries that will hamper further acceleration," it said.

The G-20 countries, it said, will grow 3.3 per cent in 2018 and 3.2 per cent in 2019. The advanced economies will grow at a moderate 2.3 per cent in 2018 and 2.0 per cent in 2019, while G-20 emerging markets will remain the growth drivers, at 5.2 per cent in both 2018 and 2019, down from 5.3 per cent in 2017.

Moody's said downside risks to growth stem from emerging markets turmoil, oil price increases and trade disputes.

"The ongoing financial market turbulence in emerging market countries poses risks of a broader negative spillover effect on growth for a range of countries beyond Argentina and Turkey, while there is a risk that high oil prices will be detrimental to consumption demand. A re-escalation of trade tensions between the US and China is another risk factor to growth. Political concerns add to downside risks in Brazil, Mexico and Italy," it said.

"Overall, we expect 2018 to be a year of robust global growth, similar to 2017," according to Moody's VP Senior Credit Officer Madhavi Bokil.

"The ongoing financial market turbulence in emerging market countries poses risks of a broader negative spillover effect on growth for a range of countries beyond Argentina and Turkey, while there is a risk that high oil prices will weigh on purchasing power and present an upside risk to inflation. A re-escalation of trade tensions between the US and China is another risk factor to growth."

The outlook for global monetary policy is broadly unchanged with the US Federal Reserve on a predictable and gradual tightening monetary policy path. Three additional increases in the US federal funds rate this year is expected to be followed by three more hikes in 2019.

The European Central Bank will likely stop additional asset purchases by year-end and start increasing the deposit facility rate in the first half of 2019. The Bank of Japan will maintain its current monetary policy over the next two years.

"Rising interest rates and currency depreciation reinforces Moody's view central banks in emerging market countries will not be able to provide monetary policy accommodation for much longer," Bokil says.