Mumbai, Oct 15

As global demand slows down, India is unlikely to be immune with the trade and capital channel being the key risks and determinants of its growth, cautioned Kotak Securities Ltd (KSL).

“A growing rhetoric of India decoupling from the rest of the world may not bear out.

“While India could fare well relatively, policy steps (and missteps) of Developed Markets will reflect in external (Current Account Deficit/Balance Of Payments/Rupee) and internal (inflation/fiscal) balances, which will be headwinds for domestic growth,” per a report put together by KSL’s economic research team comprising Suvodeep Rakshit, Upasna Bhardwaj, and Anurag Balajee. 

The economists cautioned that India faces headwinds from imminent global demand/trade slowdown, risks of higher-for-longer global inflation/ rates, dollar strengthening, and enduring geopolitical tensions.

Over the medium term, the global macro scenario will see structural shifts from the past couple of decades, they added.

Even as economic activities in India have seen sharp increases in terms of growth rates, the recovery to above pre-Covid levels is incomplete, per the report.

“Through this recovery, exports and investments have been the mainstay. Global shocks propagate to the domestic economy through four key channels: trade flows, commodity prices, capital flows, and financial sector.

“Any lower exports coupled with a relatively strong domestic growth (hence higher imports) could risk worsening the external balance. Exports have helped push GDP back to pre-pandemic levels,” the KSL economists said.

KSL maintained its FY2023-24 real GDP growth estimates at 6.8% and 6% with downside risks in the near term given the external sector headwinds.

Energy prices risk

On the other hand, India can benefit from recession-led fall in commodity prices. But energy prices’ outlook will be uncertain given the geopolitical tensions. Higher energy prices may negate much of India’s benefits from a global slowdown, opined the economists.

The economists assessed that more than domestic factors, external factors such as global slowdown, geopolitics-led risks to energy prices, dollar strengthening, and higher-for-longer global inflation and rates (implying risks of lower-for-longer global growth) will weigh on India’s macro outlook.


In the near term, the extent of INR depreciation and RBI’s response through rates and FX reserves will be watched, they said.

Over the medium term, markets will evaluate the extent of growth recovery, success in capping inflation pressures, and managing twin deficits.

Recalling the impossible trinity (fixed exchange rate, free capital flows and independent monetary policy) defending specific levels of exchange rate on a sustained basis, in an uncertain global environment, could unduly impinge on monetary policy, the economists said.

The economists opined that given an incomplete domestic growth recovery, a nascent credit growth cycle and a relatively encouraging inflation outlook, letting the INR depreciate gradually could then partly reduce the need for a sharp fiscal consolidation and aggressive hikes in policy rates to calibrate the external-internal imbalances.

“We expect USD-INR between 79 and 83 over the rest of FY2023. We pencil in terminal repo rate at 6.25-6.50% (we estimate FY2023-24 average inflation at 6.6% and 5.1%),” the economists said.