SBI revises up FY23 economic growth forecast to 7.5%

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

As per official data, the economy grew by 8.7 percent in FY22, net adding Rs 11.8 lakh crore in the year to Rs 147 lakh crore, the report said, adding this was however only 1.5 percent 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 increase by Rs 11.1 lakh crore in FY23.  This still translates into a real GDP growth of 7.5 percent for FY23, up by 20 basis points over our previous forecast," SBI chief economist Soumyakanti Ghosh said in a note on Thursday.

Nominal GDP expanded by Rs 38.6 lakh crore to Rs 237 lakh crore, or 19.5 per cent annualised. In FY23 also, as inflation remains elevated in the first half, nominal GDP will grow 16.1 percent to Rs 275 lakh crore, he said.

The report basis its optimism on the rising corporate revenue and profit and the growing bank credit coupled with ample liquidity in the system.

On rising corporate growth, the report notes that in FY22, around 2,000 listed companies reported 29 per cent top line growth and 52 per cent jump in net profit over the previous year.

Construction sectors including cement, steel, etc reported impressive growth in both revenue as well as net income with 45 per cent and 53 per cent, rise respectively in revenue.

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

Similarly, the sector-wise data for April indicates that credit offtake has happened in almost all sectors led by personal loans registering 14.7 per cent demand spike in April and contributing around 90 per cent of the incremental credit in the month, primarily driven by housing, auto and other personal loans as customers, expecting interest rate hikes, have been front-loading their purchases.

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

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

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 Rs 1.74 lakh crore from the market on durable basis (Rs 87,000 crore absorbed earlier).

High government borrowing has ruled out the possibility of OMO sale, thus CRR increase seems as the 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 Rs 1.74 lakh crore absorbed through CRR hike or Rs 1.30 lakh crore in some form to address duration supply. This will lower the market borrowing to around Rs 13 lakh crore.

Given the higher crude prices, trading over USD 120 a barrel, the report sees inflation averaging at 6.5-6.7 per cent in FY23.