ICRA projects GDP rate at 10.1% in FY22

ICRA has projected India’s GDP (at constant 2011-12 prices) to record double-digit expansion of 10.1 per cent in FY22, but cautioned that the value of the GDP will only mildly surpass the level that was recorded in FY20.

Monetary policy

The credit rating agency expects the stance of the monetary policy to be changed to neutral from accommodative in the August 2021 policy review or later, after there is greater certainty on the durability of the awaited economic revival.

With the CPI inflation expected to remain above the MPC’s 4 per cent target during FY22, ICRA expects an extended pause for the repo rate. Simultaneously, the Reserve Bank of India (RBI) may initiate steps, in a calibrated manner, to reduce the magnitude of the systemic liquidity surplus.

Additionally, ICRA anticipates that the economic recovery will exert a divergent impact on the twin deficits, with a decline in the fiscal deficit, and a reversion of the current account to a deficit in FY22 from the surplus expected in FY21.

Aditi Nayar, Principal Economist, said: “After a 7.8 per cent pandemic-driven shrinkage in the ongoing fiscal, India’s real GDP is projected to record a growth of 10.1 per cent in FY22.

“The seemingly-sharp expansion will be led by the continued normalisation in economic activities as the rollout of Covid-19 vaccines gathers traction, as well as the low base.”

ICRA expects a multi-speed recovery in FY22, with the contact-intensive sectors, discretionary consumption, and investment by the private sector trailing the rest of the economy, in the arduous march back to attainingand sustaining pre-Covid levels.

“On a sobering note, we project the aggregate value of the Indian GDP in real terms in FY22, to be only mildly higher than the level recorded in FY20,” said Nayar in a note.

Headline CPI

The agency expects the headline CPI (consumer price index) inflation to decline to 4.6 per cent in FY22 from 6.4 per cent in FY21, while exceeding the mid-point of the Monetary Policy Committee’s (MPC’s) medium target of 4 per centfor the third consecutive year.

It assessed that a favourable base would moderate the retail food inflation to an average of 4.7 per cent in FY22 from 8 per cent in FY21, despite the pressures from edible oilsand protein items such as pulses.

“With demand expected to strengthen both domestically and globally, ICRA is apprehensive that the core-CPI inflation may remain relatively sticky, and display a limited correction to 4.4 per cent in FY22 from 5.5 per cent in FY21,” the note said.

Nayar observed that government security yields will take a cue from the size of the borrowing programme of the Central and the State governments for FY22, as well as the outlook for inflation. Evolving expectations regarding the magnitude of incremental one-way and special open market operations (Twist OMOs) will also influence long-term yields.

Asthe RBI starts to drain excess systemic liquidity, shorter-end yields will display a relatively sharper hardening than longer-end yields in FY22. Accordingly, the yield curve is expected to shift up, and flatten in H2 (October-March) FY22.

As the revenue shock ebbs, ICRA projects India’s general Government (Centre + states) fiscal deficit to moderate to 8.5 per cent of GDP in FY22 from the 12.0-12.5 per cent of the GDP expected in the current year.

However, with imports expected to revive in tune with the anticipated recovery in domestic demand, the current account balance is forecast to slip back into a modest deficit of $15-20 billion (or 0.6 per cent of GDP) in FY22 from a surplus of $35-40 billion in FY21.

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