SBI Research raises FY23 economic growth forecast to 7.5%

SBI Research has projected the Indian economy would grow at 7.5% in 2022-23, an upward revision of 20 basis points from its earlier estimate.

As per official data, the economy grew 8.7%in FY22, net adding ₹11.8 lakh crore in the year to ₹147 lakh crore, SBI Research said in the report. It pointed out that this was, however, only 1.5% higher than the pre-pandemic year of FY20.

“Given the high inflation and the subsequent upcoming rate hikes, we believe that real GDP will incrementally [rise]by ₹11.1 lakh crore in FY23. This still translates into a real GDP growth of 7.5% for FY23, up by 20 basis points over our previous forecast,” SBI chief economist Soumya Kanti Ghosh said in a note on Thursday.

Nominal GDP expanded by ₹38.6 lakh crore to ₹237 lakh crore, or 19.5% annualised. In FY23 also, as inflation remained elevated in the first half, nominal GDP would grow 16.1% to ₹275 lakh crore, he said.

The research wing of the bank said it based its optimism on rising corporate revenue and profit, and growing bank credit, coupled with ample liquidity in the system.

On rising corporate growth, SBI’s research team noted that in FY22, about 2,000 listed companies reported 29% top line growth and a 52% jump in net profit over the previous year.

Interestingly, the order book position remained strong, with construction major L&T reporting 9% growth in order book position at ₹3.6 lakh crore as of March, supported by 10% growth in order inflow of ₹1.9 lakh crore in FY22 and ₹1.7 lakh crore in FY21.

Similarly, sector-wise data for April indicated that credit offtake had occurred in almost all sectors, led by personal loans registering 14.7% demand spike in April and contributing about 90% of the incremental credit in the month, primarily driven by housing, auto and other personal loans as customers, expecting interest rate increases, have been front-loading their purchases.

On the liquidity front, SBI said it expected the central bank to be supportive of growth by only gradually raising repo rates, but mostly to frontload it in June and August with a 50 basis points repo increase and 25 basis points CRR (cash reserve ratio) hike in the forthcoming June policy.

Core systemwide liquidity declined from ₹8.3 lakh crore in the beginning of the year to ₹6.8 lakh crore now, while net liquidity adjustment facility (LAF) absorption declined from ₹7.5 lakh crore to ₹3.3 lakh crore.

The RBI is likely to raise the repo rate cumulatively by 125-150 basis points over the pandemic level of 4%.

The central bank may also increase the CRR cumulatively by another 50 basis points, after raising it by 50 basis points in the last monetary policy which will lead to absorption of ₹1.74 lakh crore from the market on durable basis (₹87,000 crore absorbed earlier).

High government borrowing has ruled out the possibility of OMO sale, thus CRR increase seems a possible non-disruptive option of absorbing the durable liquidity. Furthermore, this opens up space for the central bank to conduct liquidity management in future through OMO purchases.

With this, the monetary authority can give back to the market at least three-fourths of ₹1.74 lakh crore absorbed through the increase in CRR, or ₹1.30 lakh crore, in some form to address duration supply. This will lower the market borrowing to around ₹13 lakh crore.

Given the higher crude prices, which are trading at more than $120 a barrel, the research team saw inflation averaging at 6.5-6.7% in FY23.