The Asian Development Bank (ADB), in a supplement to its flagship Asian Development Outlook (ADO) report today, cut India's GDP growth forecast for 2022-23 to 7% from 7.5% estimated earlier on higher-than-expected inflation and monetary tightening.

The GDP growth downgrade comes amid the Reserve Bank of India's (RBI) consistent approach to raising policy rates, by a total of 140 basis points this year alone to 5.4% currently. In its upcoming policy meeting this month, the key lending rates could rise further.

The Philippines-based ADB says elevated oil and commodity prices and high inflation will likely require the continued tightening of monetary policy. "Weaker than expected global demand over the next 2 years will also adversely affect exports and growth, despite the structural reforms being undertaken by the government," says the report.

India will grow strongly over the forecast horizon, with investment playing a catalytic role, it adds. "On the assumption that global demand will remain sluggish and oil prices elevated, ADO 2022 Update revises down the forecasts for growth to 7.0% for FY2022 (ending in March 2023) from ADO 2022’s 7.5% projection and to 7.2% from 8.0% for FY2023 (ending in March 2024)."

ADB says inflation will also remain elevated in this and next fiscal year. "ADO 2022 update forecasts the inflation rate averaging 6.7% in FY2022 (ending in March 2023) before moderating to 5.8% in FY2023, just below the central bank target range of 2%–6%."

The global bank says though supply pressures may ease in FY23, upward pressure on inflation could continue because of demand-side pressures caused by increasing economic activity.

Lowering the developing Asia growth outlook, ADB says the region’s economy is expected to grow 4.3% this year, compared with the bank’s projection in April of a 5.2% expansion. The growth forecast for the next year has also been lowered to 4.9% from 5.3%, while the region’s inflation forecast has been raised. Excluding China, the rest of developing Asia is projected to grow by 5.3% in both 2022 and 2023, says the ADB report.

ADB has also raised its forecast for inflation in developing Asia this year to 4.5% from a previous projection of 3.7%. The forecast for next year is 4.0%, up from 3.1%. "While inflation in the region remains lower than elsewhere, supply disruptions continue to push up food and fuel prices."

China's growth outlook this year (FY2022 ending March 2023) was downgraded to 3.3% from a 5.0% projection earlier. This will be the first year in more than 3 decades that the rest of developing Asia will grow faster than China. For FY23, China is expected to grow at 4.5%.

Earlier this month, global ratings agency Fitch Ratings had also slashed India's GDP growth forecast to 7% in the financial year ending March 2023 (FY23) from 7.8% previously on high inflation and tighter monetary policy. It expected the Indian economy to grow at 6.7% during FY 2023-24, lower than its earlier projection of 7.4%.

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