Goldman Sachs expects the Reserve Bank of India (RBI) to hike the repo rate by 50 basis points (bps) in the December 2022 policy meeting.

Given upside risks to core services inflation, and India running negative real rates, this will be followed by a 35 bps rate hike in February 2023 which would take the key policy rate to a peak of 6.75%, writes Santanu Sengupta, India economist, Goldman Sachs.

The financial services major forecasts India's Consumer Price Index (CPI) inflation to decrease to 6.1% year-on-year in 2023 from 6.8% in 2022, as active government intervention through subsidies is likely to contain food inflation. "We think core goods inflation has peaked, but upside risks to services inflation are likely to keep core inflation sticky around 6% YoY," Sengupta says.

India's retail inflation eased to a three-month low of 6.77% in October, down from 7.41% in September 2022. Retail inflation, however, remained above the Reserve Bank of India's (RBI) upper tolerance band of 6% for the 10th consecutive month.

Goldman Sachs forecasts the Indian rupee to hit 84 against the US dollar over the next three months. "Given our view of an impending dollar peak, we forecast USD/INR at 84/83/82 over 3M/6M/12M horizons," the India Outlook 2023 report says.

India's current account deficit is likely to remain wide given export drag from the global slowdown, though resilient services exports are likely to provide some cushion, it says. Commodity strategists at Goldman expect oil prices to rise to $110 per barrel in 2023 versus $103/bbl in 2022 (year-to-date average). This, along with a global growth slowdown, and relatively resilient domestic growth in India is likely to keep the current account deficit at 3.5% of GDP ($124 billion) in 2023 compared with 3.4% of GDP ($116 billion) in 2022.

However, growth capital may continue to chase India, as global firms are looking to diversify sources of supply ("China +1"), and India presents an attractive opportunity over the long term, the report adds.

Due to geopolitical tensions between the US and China/Russia, several Western firms are also looking at new destinations for manufacturing, says Goldman Sachs, adding that India presents a potentially attractive consumer market over the long term.

The biggest opportunity for India to spur economic growth and job creation in this decade, is to develop globally competitive manufacturing hubs as the world restructures the supply chains, the report says. If India is able to capitalise on this opportunity, it will be able to attract a large share of global inbound manufacturing FDI, it adds.

The financial services company expects India's gross domestic product to grow at 5.9% in the calendar year 2023 compared with 6.9% in 2022. "Growth will likely be a tale of two halves, with a slower first half as the reopening boost fades, and monetary tightening weighs on domestic demand. In the second half, growth is likely to re-accelerate as global growth recovers, drag from net exports diminishes, and investment cycle picks up," Sengupta says.

Goldman Sachs expects the government to continue its focus on capital spending. "We forecast around 7% yoy growth in both consumption and investment with the risks to investment growth tilted to the upside, if manufacturing in India picks up, as ‘Make in India’ efforts come to fruition," the report says.

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