The week gone by saw two major economic events relevant for India along with a key economic forecast update for the global economy
1. Taking stock of global economic forecasts
The International Monetary Fund in its quarterly review of the global economy presented few notable changes in its key economic forecasts.
- While World GDP growth forecast for 2023 got revised up, projection for the incremental loss of momentum compared to 2022 remains unchanged at 50 bps. The mark-up predominantly reflects the re-opening impact of the Chinese economy.
- Recovery expectation for 2024 remains intact; although it is likely to be mild, with World GDP growth forecasted to be lower vs. the long term (2000-19) average of 3.8%.
- Forecast for volume of world trade (goods + services) saw a downward revision for both 2023 and 2024, although 2024 continues to depict a moderate recovery in global trade volumes.
IMF’s key global economic forecasts (%, as of Jan-23)
| 2022 Estimate | 2023 Forecast | 2024 Forecast | |
| World GDP | 3.4 (+0.2) | 2.9 (+0.2) | 3.1 (-0.1) |
| US | 2.0 (+0.4) | 1.4 (+0.4) | 1.0 (-0.2) |
| Eurozone | 3.5 (+0.4) | 0.7 (+0.2) | 1.6 (-0.2) |
| UK | 4.1 (+0.5) | -0.6 (-0.9) | 0.9 (+0.3) |
| China | 3.0 (-0.2) | 5.2 (+0.8) | 4.5 (no change) |
| India | 6.8 (no change) | 6.1 (no change) | 6.8 (no change) |
| World Trade Volume (Goods + Services) | 5.4 (+1.1) | 2.4 (-0.1) | 3.4 (-0.3) |
Data: IMF, QuantEco Research
In the near term, the massive earthquake in Turkey (besides its humanitarian impact) is likely to have a mild impact on India’s exports, which stood at USD 10.0 bn in 2022 (2.2% in India’s export basket). As per the Global Trade Research Initiative, suspension of one of the two main container ports is Turkey will delay shipments and could potentially take about a month to normalize its activity. It is likely that discretionary items like Yarns, Dyes, and Gems & Jewellery could see negative export growth in Feb-Mar 2023.
2. Key takeaways from the 2023-24 Union Budget
- Target for fiscal deficit was lowered to 5.9% of GDP from 6.4% in 2022-23.
- While the Budget refrained from any big bang policy announcements, quality of spending got a significant boost with hike in allocation for capital expenditure to a two decade high of 3.3% of GDP from 2.7% in 2022-23. Bulk of the capex in 2023-24 would be driven by railways, roads, defence, telecom, petroleum, and housing & urban development.
- From exports perspective, the Budget hiked allocation for some key schemes like the Remission of Duties and Taxes on Export Products (up 10.0% to Rs 15069 cr), Rebate of State and Central Taxes and Levies (up 12.7% to Rs 8405 cr), and Interest Equalisation Scheme (up 23.4% to Rs 2932 cr). This is expected to help improve cost efficiency for SME exporters.
- Targeted reduction in import duty for specific products will build on
addto the competitiveness of exports of chemical products, marine products, gems & jewellery, and electronic items. In addition, the Budget increased the allocation for the PLI (Performance Linked Incentives) Scheme by 67.7% to Rs 8,083 cr, with bulk of the increase earmarked for electronics & hardware, food processing, automobiles, and pharmaceuticals sector.
3. US central bank normalizes rate hikes
The US Federal reserve announced a 25 bps rate hike on Feb 1st , taking the fed funds rate range to 4.50-4.75%, taking cumulative tightening done since 2022 to 450 bps. Market participants expect one further round of 25 bps rate hike in Mar-23 before the Fed gets into a pause.
The downshift in Fed’s monetary policy aggression will reduce the pressure on other central banks. As expected, the RBI has also stepped down in magnitude of rate hike to 25 bps in Feb-23 from 35 bps in Dec-22. Going forward, we expect the RBI to announce its last rate hike of 25 bps in Apr-23, after which it could get into a pause mode for impact assessment.delivered its final 25 bps rate hike in the current tightening cycle on Feb 8th, after which it is expected to maintain an extended pause.
INR: Starts 2023 on a positive note, but mild depreciation bias to persist
The Indian Rupee appreciated by 1.0% in the month of Jan-23, which was predominantly a reflection of underlying weakness in the US Dollar. Expectation of rate hike cycle ending earlier in US vis-à-vis its key peers is weighing upon the dollar. While this could provide some near-term appreciation pressure on INR, we believe the RBI would use this opportunity to rebuild FX reserves (by purchasing USD) and thereby limit INR appreciation. We continue to expect USDINR to trade close to 83.5 levels by Mar-23, and towards 85.5 levels by Mar-24 on likelihood of persistence in India’s Balance of Payments Deficit.
INR: Starts 2023 on a positive note, but mild depreciation bias to persist
The Indian Rupee appreciated by 1.0% in the month of Jan-23, which was predominantly a reflection of underlying weakness in the US Dollar. Expectation of rate hike cycle ending earlier in US vis-à-vis its key peers is weighing upon the dollar. While this could provide some near-term appreciation pressure on INR, we believe the RBI would use this opportunity to rebuild FX reserves (by purchasing USD) and thereby limit INR appreciation. We continue to expect USDINR to trade close to 83.5 levels by Mar-23, and towards 85.5 levels by Mar-24 on likelihood of persistence in India’s Balance of Payments Deficit.
India’s FX reserves have increased for four consecutive months
Note: Data is for end of month; for Jan 2023, it is for week ending 27th. Change in reserves can be on account of actual purchase/sale of dollars and gold by the RBI along with revaluation impact.
Data: RBI, QuantEco Research
* BoP deficit for 2022-23 is our forecast. Change in USDINR in 2022-23 is as of Jan 17th.
What should Exporters Do ?
- Be cautious on Buyer Credit risk and mitigate 100% of the exposure using Export Factoring or Credit Insurance (ECGC, private) for all of their exports. 2023 still seems quite a volatile year and not the time to take any form of risk on Buyers (for open account business).
- There is expectation that this year sizable demand from US/EU that was catered by China will move to India (China + 1) especially across Synthetic Apparels, Pharma, Metal fabricated products, handicrafts, toys, leather products, etc. This can be a good opportunity to build scale for Indian exporters.
Website: https://www.quanteco.in/
