RBI lowers FY22 GDP forecast to 9.5%, CPI inflation projected at 5.1%

The Reserve Bank of India (RBI) has cut its projection for gross domestic product (GDP) growth for fiscal 2021-22 (FY22) to 9.5 per cent from the earlier forecast of 10.5 per cent. Consumer price inflation (CPI), the central bank said, is likely to be at 5.1 per cent in FY22 as compared to the earlier forecast of 5.2 per cent (5.2 per cent in Q1; 5.4 per cent in Q2; 4.7 per cent in Q3; and 5.3 per cent in Q4) with risks evenly balanced.

“Going forward, the inflation trajectory is likely to be shaped by uncertainties impinging on the upside and the downside. The rising trajectory of international commodity prices, especially of crude, together with logistics costs, pose upside risks to the inflation outlook,” the RBI said.

Adding: “Rural demand remains strong and the expected normal monsoon bodes well for sustaining its buoyancy, going forward. The increased spread of COVID-19 infections in rural areas, however, poses downside risks.”

The lowering of GDP projections comes on the back of the second wave of Covid infections that brought the Indian economy to a near standstill over the past few weeks. The GDP growth estimate is close to what most leading economists and brokerages have recently forecast. 

Moody's, for instance, pegged India's GDP growth at 9.3 per cent in FY22 and 7.9 per cent in FY23.

"We expect a decline in economic activity in the April-June quarter, followed by a rebound, resulting in real, inflation-adjusted GDP growth of 9.3 per cent in the fiscal year ending March 2022 and 7.9 per cent in fiscal 2022-23," it said.

The services PMI fell into the contraction zone of 46.1 in May from 54 in April, while the manufacturing PMI moderated to 50.8 from 55.5. The May economic data, according to analysts at Nomura, shows a bigger impact on consumption and services, with manufacturing and the export sector holding steady, and importantly, the hit during the second wave is significantly less than the first wave across-the-board.

"The bottoming of the mobility indicators at end-May and the calibrated re-opening across states suggests that the worst might be over, although growth will likely rise only gradually in June. We maintain our view that the hit to growth in Q2 will be a fraction of what took place during the first wave (second wave hit of -3.8 per cent q-o-q, verus first wave hit of -24.8 per cent in Q2 2020) and also lesser than currently feared by consensus," wrote Sonal Varma, managing director and chief India economist at Nomura, in a recent co-authored note with Aurodeep Nandi.

Meanwhile, Barclays recently pegged India’s FY22 GDP growth at 7.7 per cent in the bear-case scenario, if the country is hit by the third wave of the Covid pandemic going ahead, which assumes another wave of infections and a two-month period of restrictions that disrupt economic activity in the second half of calendar year 2021 (H2-21), evenly split between the third and the fourth quarters (Q3 and Q4).