Are falling growth rates the next big worry for Indian equity markets?

A dip in demand amid rising inflation and central bank policies has seen brokerages, such as Goldman Sachs and Morgan Stanley, cut their respective growth estimates for the Indian economy

Galloping inflation that hit decadal highs and prompted global central banks to hike rates dented sentiment across equity markets in the early part of calendar year 2022. A dip in demand for goods and services as a fallout of rising inflation and central bank policies has seen analysts across brokerages, such as Goldman Sachs and Morgan Stanley, cut their respective growth estimates for the Indian economy as measured by the gross domestic product (GDP).

While Goldman Sachs has cut the full-year 2022 GDP growth forecast for India to 7 per cent from 7.6 per cent and also lowered the current fiscal year estimates by 20 basis points from 7.2 per cent, those at Morgan Stanley cautioned against a downside risk of 40 basis points (bps) to their earlier growth estimate of 7.2 per cent for fiscal year 2022-23.

On Thursday, Moody's, too, lowered its G-20 growth forecasts to 2.5 per cent - down from a May projection of 3.1 per cent - in 2022, followed by 2.1 per cent in 2023.

“Our revised projections reflect the hit to households’ purchasing power from unrelenting inflation and rapid tightening of global financial conditions because of the hawkish policy pivot of central banks, particularly that of the Fed. COVID-19 restrictions in China and cuts in Russian gas supply to Europe are weighing on the economic outlooks for advanced and emerging economies,” Moody's said in a recent release.

So, what does it mean for the Indian equity markets?

Over the next few months, analysts believe, global pain could moderate India’s GDP growth, but remain hopeful that India will still maintain one of the fastest GDP growth rates among major global economies. The market sentiment back home in this backdrop, they said, can only see a temporary setback.

Global pain in terms of recession or deflationary conditions in the US and Europe, believes G Chokkalingam, founder and chief investment officer at Equinomics Research, would lead to further fall in oil prices that would help the Indian economy in terms of taming inflation, lower trade deficit, avoid erosion in forex reserves and strengthen the rupee.

“We remain optimistic on the road ahead for the Indian economy and markets from a medium-to-long term perspective considering the possibility of cheap oil, fastest GDP growth and other indicators like good monsoon, robust tax collections and a continued double-digit growth in corporate earnings. Thus, domestic markets may fall, but will recover equally fast after every significant fall. Only any possible war among any major countries would be a possible risk to our view,” he said.

Meanwhile, India’s GDP for the April-June 2022-23 (Q1-FY23) came in 13.5 per cent despite the low base of the equivalent period of 2021-22, when economic activity was severely impacted by the Delta wave of the pandemic. The figure was below analysts' expectations.

Sequentially, gross domestic product (GDP) contracted 9.6 per cent in the June quarter of FY23 compared to the March quarter of FY22, data showed. However, the seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) was little-changed from July's reading of 56.4, coming in at 56.2 in August.

“The markets will only see a knee-jerk reaction to such economic data and bounce back. Even at the current numbers, there will be very few economies/countries globally that can come close to clocking the GDP what India is doing right now, or may do going ahead. Every dip is a good opportunity to buy from a long-term perspective,” said Gaurang Shah, head investment strategist at Geojit Financial Services.