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India’s economy the ‘star’ of the show

India will be ‘the star’ of emerging market economies, as rising interest rates and energy insecurity hampers growth in the vast majority of countries across the world, according to S&P Global Ratings.

S&P said it estimates India’s economy will see 7.3% growth this fiscal year, although global economic performance over the next few quarters will see a slowdown in growth.

Growth eased in the second quarter across emerging markets as inflation reduced real household income, business confidence deteriorated, and the external environment became more complicated, the S&P report said.

It also said that central banks in emerging economies have been ahead of countries with advanced economies in raising interest rates, saying many countries in Latin America “are now near the end of their tightening cycles”.

Elsewhere, core inflation continues to rise, the report added.

“For the 16 emerging economies that we cover, excluding China, 2022 GDP growth will hit 5.2% this year, in our view,” S&P said. “This forecast is up 30 basis points from our previous round. India is the star of this group with growth of 7.3% this fiscal year (ending March 2023).”

The US-based agency said: “As central banks aggressively raise rates to fight inflation, our confidence is waning that they can avoid generating a sharp downturn.

“We are now expecting a mild recession in the US,” it said, adding that rising interest rates, increased European energy insecurity, and the lingering effects of Covid-19 are hitting growth almost everywhere.

“This may be the most anticipated economic slowdown on record, but the data has yet to fully fall in line,” S&P said.

 

Factory growth slows

In a separate survey, S&P found that India’s factory growth fell to a three-month low in September. The Manufacturing Purchasing Managers’ Index fell to 55.1 in September from 56.2 in August, below the 55.8 predicted by economists in a Reuters poll. However, it was the 15th consecutive month that growth was above the 50 mark that separates growth from contraction.

“The Indian manufacturing industry remains in good shape, despite considerable global headwinds and recession fears elsewhere,” said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

“There were softer, but substantial, increases in new orders and production in September, with some leading indicators suggesting that output looks set to expand further at least in the short-term.”

Input costs rose at the slowest pace since October 2020 and most firms reported no change in purchasing prices.

Optimism about future output was at the highest level in seven-and-a-half years and international demand was the strongest since May, led by robust external demand for goods amid a weak Indian rupee.

However De Lima warned: “Currency risks and the impact of a weaker rupee on inflation and interest rates could derail optimism during October.”

The Reserve Bank of India has been selling dollars to stem the currency depreciation, and also hiked interest rates by 50 basis points in early October, to 5.9%.

 

Knock-on effect of rate rise

Real estate companies have warned that the recent rate increase of 50 basis points was bigger than expected, and say it could have a detrimental effect on India’s property market.

“We had expected a rate hike by 2% by December but with the latest round of hike of 50 basis points, the cumulative interest rate rise is 1.9%. It has come two to three months earlier than our expectations,” commented Credai West Bengal president Sushil Mohta.

With the latest rise, the short-term lending rate at which banks borrow from the central bank is now close to 6%.

“Any further rate hike in the near term will put a brake on the revival of the real estate sector, which [makes] a huge contribution to the economy,” he said.

Many lenders in the mortgage market, including the State Bank of India and Bank of India, raised rates following RBI’s move. Mortgage lender HDFC Ltd raised its lending rate by 50 basis points immediately – the seventh rate increase it has made in the past five months, with an aggregate hike of 1.9%.

“The real estate sector’s contribution to the country’s GDP was 7% in 2019-2020 and it will be 10% by 2030, contributing about $1 trillion to the economy, as per government projection. But the interest rate scenario will be a key factor in this journey,” Mohta said.