Why Nomura thinks Indian policymakers' optimism on GDP growth is "misplaced"

Japanese brokerage Nomura has slashed India's growth forecast for the next financial year, following similar moves by several international agencies including the International Monetary Fund and the World Bank, as well as brokerages and ratings agencies. 

India's growth rate for FY24 is likely to witness a sharp moderation to 5.2 per cent as compared to FY23, said Nomura.

Why is Nomura’s warning particularly worrying?

According to the brokerage, Indian policymakers are "misplaced" about their optimism on the country's growth prospects. After a week-long meetings with policymakers, corporates, commercial banks and political experts, its economists said its FY23 GDP growth estimate is at 7 per cent - at par with the RBI's revised down forecast - but it expects a "sharp moderation" to 5.2 per cent in FY24.

The brokerage said the mood in the country is "relatively positive" with risks seen emanating from weaker global demand, and added that domestic recovery is getting broad-based as seen through pick-up in investments and higher credit growth.

What have Nomura analysts said?

"While we broadly agree with our interlocutors on the growth prospects in FY23, we believe the optimism in FY24 may be misplaced and that the spillover effects from the global slowdown are being underestimated," PTI quoted economists Sonal Verma and Aurodeep Nandi as saying.

But the RBI has been firefighting to tackle runaway inflation, right?

Yes. The RBI has hiked repo rate by 190 basis points since May to tame inflation and is expected to do more, especially amid faster rate tightening by the US Fed, which is bound to impact growth.

What have India’s economic growth metrics looked like over the past few years?

The economy grew at 4 per cent in FY20 in a multi-year low. The estimated slowdown in growth in FY24 will come ahead of the next general elections.

What has Nomura said about any more impending rate hikes by the RBI?

The brokerage said it expects the RBI to go for a 35 basis points hike at the December meeting and deliver a 25 basis points increase in February to take the repo rate to 6.50 per cent.

And what about inflation?

It expects inflation to average at 6.8 per cent in FY23, a tad above the RBI's 6.7 per cent estimate, and cool down to 5.3 per cent in FY24. On the fiscal consolidation front, it said expenditure cuts would be necessary to meet the 6.4 per cent fiscal deficit target for FY23 and added that it is "circumspect" about a sub-6 per cent target for FY24.

What does Nomura say on current account deficit?

The brokerage said it expects the current account deficit to widen, with a weaker currency to follow. It said market participants believe there is no "line-in-the-sand" for either forex reserves which stood at over $530 billion, or the level of the rupee.

Does Nomura have any advice for Indian policymakers?

Yes. It recommended policy vigilance amid the global headwinds, and underlined that macro stability should be the priority over growth.