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Moody's reduces India's growth forecast to 7%.

The rupee and oil prices are the main reasons for the downward revision for 2022-23; growth will fall below 5% next year.

Moody's Investors Service reduced India's 2022-23 growth projection from 7.7% to 7% on Friday, November 11, 2022, citing the weakening rupee and high oil prices, and warned that the economy's growth will slow even further to 4.8% in 2023-24.

"The downward revision assumes that higher inflation, high interest rates, and slowing global growth will dampen economic momentum by more than we previously expected," the firm noted, noting that the weakening rupee and rising oil prices continue to put pressure on inflation.

Moody's downgraded forecasts for a number of G-20 countries, including the United States, China, Japan, India, and a number of European countries, in its latest global macro outlook for 2023-24. The G-20 economies' real GDP is expected to fall from 2.5% in 2022 to 1.3% in 2023, a significant decrease from Moody's previous estimate of 2.1%.

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India and Brazil will be 'less vulnerable.'

However, the G-20 emerging market economies' growth outcomes will vary depending on economic structures, with large domestically driven emerging market economies like India and Brazil expected to be 'less vulnerable' to weakening G-7 growth than export-oriented countries.

Amid a flurry of negative global growth drivers, Moody's said some country-specific characteristics provide some strength, such as consumer resilience from still strong post-COVID recovery momentum in domestically driven economies such as the United States, Brazil, and India, as evidenced by robust service expenditure.

The underlying growth dynamics in India are fundamentally strong, aided by a rebound in services activity. According to the firm, government capital expenditure and manufacturing capacity utilisation have both improved.

"These domestic strengths will continue to support the domestic growth narrative; however, global financial tightening and slowing external demand will put downward pressure on growth in 2023," the rating agency said. After falling to 4.8% in 2023-24, India's growth is expected to rebound to around 6.4% the following year.

Moody's forecast for 2023-24 growth is significantly lower than that of other agencies. For example, S&P Global Ratings expects India to grow 7.3% this year and 6.5% in 2023-24.

With retail inflation rebounding to 7.5% in September after falling below 7% in July and remaining outside the Reserve Bank of India's target range this year, Moody's expects the central bank to raise the repo rate by another 50 basis points or so to anchor inflation expectations and support the rupee's exchange rate. A basis point is equal to 0.01%.

"Eventually, the RBI will likely shift from inflation management to growth considerations," it predicted.

The rating agency noted that India's 'deleveraged' private sector is now well positioned to increase capital expenditure, and that India will benefit from shifts in global capital investment away from China, as supply chains diversify.

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