UBS Upgrades India’s GDP Targets for the Year

In the midst of all the valuation concerns floating around in the market, global investment bank UBS has raised India’s GDP growth forecast for FY22 by 60 bps from 8.9% to 9.5%. The RBI has pegged India’s growth rate for FY22 at around 10%. India reported GDP growth of 20.1% in the Jun-21 quarter.

The Sep-21 quarter will be reported on the last day of November and will form an important input for extrapolating full year GDP growth.

However, UBS does expect GDP growth to moderate in subsequent years as the base effect wanes. It is estimating India GDP to grow at 7.7% for FY23 and at just about 6% for FY24. During FY23, UBS is also pegging a reversal of the easy money policy wherein the RBI would hike the repo rates by at least 50 bps in two tranches.

The GDP upgrade for FY22 is predicated on 3 broad factors. Firstly, UBS expects that the faster than expected recovery from COVID 2.0 would translate into better growth traction. Secondly, it expects credit growth to have a multiplier effect on the overall economic growth.

Lastly, UBS also expects a sharp spike in consumption spending in the third and fourth quarters of the year led by revenge buying.

However, UBS has also underlined two risk factors to these estimates. It estimates that the current output gap, where demand far exceeds supply, may exist all the way up to 2024.

That would keep most of the commodity prices under pressure and put some strain on the input costs for corporates and hence their operating margins. UBS also expects consumer inflation to remain at elevated levels due to higher levels of core inflation in the economy.

UBS uses its proprietary UBS Activity Indicator which closely tracks growth momentum on a sequential basis. In the Jun-21 quarter, the UBS Activity Indicator had shown sequential contraction of -11% but that has turned around in the September quarter to a more positive +16.8%.

The momentum is further underscored by the fact that this Activity Indicator has remained in the positive even for the month of October, albeit at a moderated 3.1%.

UBS also expects the capital cycle to revive post FY22. Incremental growth would come from infrastructure spending, industrial capex and exports. However, the pace at which RBI winds down its easy money policy will be a key risk factor.