India’s GDP will grow at 7.5% in the financial year 2022-23, up from 7.3% estimated earlier, on the back of a better statistical base and continued credit growth but there are “significant uncertainties” regarding the estimates, SBI Research’s group chief economic advisor Soumya Kanti Ghosh says in the latest report.

The real GDP will incrementally increase by ₹11.1 lakh crore in FY23, which translates into a real GDP growth of 7.5% for FY23, the report adds. It estimates the RBI could adopt a 50 basis point hike in repo rate and a 25 basis point hike in cash reserve ratio forthcoming the June policy.

SBI's growth projections seem in sync with the central bank. The RBI in April had projected the GDP to grow at 7.2% in FY23. However, the finance ministry had said rising crude oil prices are hurdles in India's aim to achieve 8% GDP in FY23.

International organisations like the International Monetary Fund, the World Bank and the United Nations had earlier projected India's GDP FY23 growth at 8.2%, 8% and 6.4%, respectively.

Notably, the Centre in its GDP estimates on May 31 said India’s economy grew by 8.7% to ₹147 lakh crore in FY22, adding ₹11.8 lakh crore in real terms during the year. The GDP growth for Q4 FY22 was 4.1%.

The real GDP will incrementally increase by ₹11.1 lakh crore in FY23, SBI thinks, given the high inflation and the subsequent upcoming rate hikes. “This still translates into a real GDP growth at 7.5% for FY23. Nominal GDP for FY22 expanded by Rs 38.6 lakh crore to Rs 237 lakh crore, a y-o-y growth of a whopping 19.5%. For FY23 also, as inflation remains elevated in the first half, our projection is that nominal GDP will grow by 16.1% to Rs 275 lakh crore,” the report adds.

The RBI, via its monetary policy moves, is expected to support growth and hike repo rates gradually, but mostly frontload it in June and August policy. “We now expect a 50 basis point repo rate hike and 25 basis point CRR hike in the forthcoming June policy.”

The central bank is likely to raise the repo rate cumulatively by 125-150 basis points over the pandemic level at 4%, the report says, adding that it may also increase the CRR rate, cumulatively, by another 50 bps, after raising it by 50 bps in the last monetary policy.

“This would lead to absorption of Rs 1.74 lakh crore from the market on a durable basis (Rs 87,000 crore absorbed earlier).”

Basis for upgrade in GDP growth

In FY22, around 2,000 corporates, in listed space, reported 29% growth in top line and 52% growth in profit after tax (PAT) as compared to the previous year, shows the SBI assessment. “Construction sectors, including cement, steel etc., reported impressive growth numbers in both revenues as well as PAT. Both the construction and steel sector reported growth of 45% and 53%, respectively, in revenue in FY22 as compared to FY21.”

With regard to the current financial year, order book position also remains strong, it says, adding the sector-wise data for April indicates that credit off-take has happened in almost all sectors.

High government borrowing also rules out the possibility of OMO (open market operation) sale, thus CRR increase seems as the possible non-disruptive option of absorbing the durable liquidity, says the report. “This opens up space for RBI to conduct liquidity management in future through OMO purchase.”

However, crude oil prices, currently at $120/bbl, pose significant uncertainties regarding inflation trajectory, SBI says, adding that inflation could average 6.5%-6.7% in FY23 on the back of excise rate cuts by the government. Its independent forecast says oil prices could climb further before declining, but they might “still hold up at current levels for a longer period of time”.

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