Prospects for the Indian Economy Heading into 2022
In the second year of the pandemic, India started with a strong rebound in growth with 20.1% quarterly GDP growth in Q1 2021. Following that, the second wave dealt a huge blow to the economy, which according to the Reserve Bank of India (RBI) cost the country an estimated ₹2 lakh crore in economic output for FY 2021-22. However, in the latter half of 2021, the Indian economy has revived steadily.
For the Indian stock market, the year was full of milestones. All 9 National Stock Exchange (NSE) sectoral indices rose during the year, with the NIFTY metal index rising more than 70% for the first time since 2009. Amid the rise in remote working models across India, the NIFTY IT rose 58%, its best since 2009 as well. The BSE Sensex gained over 10,000 points in 2021, its best performance among major Asian economies.
For the Indian stock market, the year was full of milestones. All 9 National Stock Exchange (NSE) sectoral indices rose during the year, with the NIFTY metal index rising more than 70% for the first time since 2009.
Global macroeconomic policies continued to impact India through 2021. Inflation continued at higher levels due to a worldwide dovish monetary policy stance. But the good thing was that vaccination rates significantly rose as well, promising a brighter outlook in 2022. Over 143.15 crore people were now fully vaccinated as of December 29, 2021. Goldman Sachs revised its growth projection for India for FY 2022 at 9.1% GDP growth, compared to the previous forecast of 8%. Fitch Ratings predicts 10.3% growth for 2022.
Here are some trends that are expected to remain in focus for the economy in 2022.
India’s Fundamentals Remain Strong to Withstand the Taper Tantrum
In 2022, major central banks and governments worldwide, starting with the US Federal Reserve, will start rolling back their extensive stimulus measures. Interest rates are expected to be hiked by the second half of 2022. A possible consequence of this will be that investors worldwide will start withdrawing capital from emerging economies like India, in favour of the US dollar and securities. India too could be potentially impacted by liquidity shortages for the short term, impacting asset valuations.
However, India’s economic fundamentals appear to be stronger now to withstand this. Although it lost 2% of its value in 2021, the Indian Rupee has fared much better than its peers in the region, and the Indian sovereign bond yield has continued to decline since January 2020. This shows declining risks associated with sovereign borrowings. Plus, India’s creditworthiness has been stable despite the pandemic-related uncertainties. A stable domestic currency and a stronger economic outlook have improved investor confidence in the market.
Growing Inflation Will Push the RBI to Raise Rates Soon
In sync with the global trend, the annual inflation rate in India has been high. In November 2021, it stood at 4.91%, up from 4.48% in October 2021. A huge surge in global crude oil price is also responsible for this, as India is a major oil importer. Global supply chain bottlenecks have impacted companies worldwide and Indian firms have been no different.
The RBI is expected to ease consumer concerns by raising interest rates, although within the central bank’s target range. The market expects the inflation rate to cross the RBI’s 5.3% estimate for 2022, reaching 6% in Q1 2022. The central bank is expected to raise interest rates by 100 basis points. This could mean an appreciation of the Indian Rupee against the US Dollar.
The Indian Stock Market Will Continue to Surge Ahead
Analysts expect moderate returns in 2022, as accommodative monetary policies start to wane. At the same time, normalisation of pent-up demand, rising vaccination rates, and gradual easing of semiconductor shortages will help Indian companies grow. Indian equities might see a short-term correction and consolidation, while strong earnings growth in many sectors could provide investment opportunities. Credit Suisse expects Indian equities to gain a higher valuation premium, while Standard Chartered expects equities to outperform bonds and cash.
The lurking Omicron virus and its threat to the global economy is a significant risk going forward. Several important state elections in the country in 2022 could further elevate the rate of transmission.