India 2022 Outlook: Shifting to a higher gear

Recovery is expected to turn more broad-based in 2022.
Radhika Rao, Philip Wee, Eugene Leow02 Dec 2021
  • We see FY23 growth at 7% yoy, amongst the fastest in the region
  • Four catalysts could spur capex growth, led by the public sector
  • Sticky inflation and on-course recovery support our rate hike call for 2H22
  • USD/INR has been stable between 72 and 77 in 2020-2021, it is likely to remain so in 2022-2023
  • INR yield curve could gradually steepen in 2022 as RBI normalises policy
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With a receding Covid case count, India’s recovery is turning more broad-based. Into FY23, beyond the thrust from reopening gains, precautionary savings and sectoral normalisation to pre-pandemic levels, capex generation is likely to be next driver to raise and maintain growth on a higher plane. With the government needed at the wheel in the initial phase, we expect the private sector to participate thereafter when ongoing deleveraging is complete. State elections are lined up ahead, majority of within 1H22. We see FY23 growth at 7% yoy, amongst the fastest in the region, from an estimated 9.5% this year.

Catalysts are in place for a renewed capex cycle, which could return growth to a more sustained uptrend. The RBI’s industrial capacity utilisation hovers below its long-term average, questioning the wisdom of an imminent industrial capex upcycle. We are of the view that a host of cyclical ingredients are on the horizon setting the stage for a multi-year lift-off.

Macro stability to prevail 

  • Mapping the monetary policy exit  strategy - While on-track recovery and above-target inflation make a case for policy normalisation, authorities are likely to be watchful of the new risk on the horizon – the Omicron variant. Notwithstanding the caution, we still expect a gradual exit from the ultra-accommodative policy settings to continue. 
  • Our Financial Conditions Index for India (Mapping India’s Financial Conditions Index (FCI)) shows the aggregate monthly index is a shade above the baseline (zero) mark as of late-October. The sub-segments i.e., bond and currency indices signal incipient tightness, which is negated in part by gains in the equity sub-index (to arrive at the aggregate). 
  • Manageable current account balance and buffered external cushion - We expect the FY22 current account deficit (CAD) to widen to -1.5% of GDP from a 0.9% surplus in FY21, primarily due to a wider merchandise trade gap. Looking into FY23, domestic demand recovery and a wide commodity bill could keep the current account deficit wide at -1.6% of GDP, but narrower than the past and with comfortable financing capabilities. The strong FX reserves buffer will offset any vulnerability on account of a wider current account deficit, moderating portfolio flows and US Fed commencing its taper program. The RBI’s FX intervention strategy is likely to more two-sided in 2022, preventing excessive depreciation pressure on the rupee due to a firm US dollar, Fed’s upcoming taper and high commodity prices, whilst keeping in tune with the regional price action to preserve trade competitiveness and contain imported price pressures. 
  • Fiscal consolidation to stay on track - Strong revenues and slower expenditure have helped to keep the FY22 fiscal slippage in check at the halfway mark. Based on our assumption of the run-rate, catch-up in the pace of expenditure to budgeted levels at INR and double-digit nominal GDP growth suggest that the full-year target could translate into -6.6% of GDP fiscal deficit, lower than the budgeted -6.8%. We are of the view that fiscal consolidation will ensue but be slow-paced as the cushion from higher revenues and strong growth is likely to fund welfare programs (NREGA and subsidies) and higher vaccination outlay rather than sharply narrow deficits. Into FY23, we expect the deficits to narrow further, with budgeted target likely at -6% of GDP. 
  • Public debt levels to narrow gradually - India’s consolidated centre plus states debt is likely to increase to nearly 90% of GDP from 75% in FY19 owing to higher spending through the pandemic and weaker revenues, in midst of a sharp fall in economic activity. Building in our assumptions of double-digit nominal GDP growth and gradual consolidation in the combined deficit, we expect the debt level to ease towards 86% of GDP.


Key state elections lined up next year

 Seven states will be poll bound over the course of 2022, of which five within first part of the year. This includes the ones with high electoral significance like the political bellweather state of Uttar Pradesh, besides Uttarakhand, and Punjab (rest Goa, Manipur, Himachal Pradesh, Gujarat). The ruling party is the incumbent in most of the states and is likely to put up a strong fight to retain its strength and increase vote share in the rest. Development metrics, farming communities’ priorities, progress on health, education, poverty alleviation and employment prospects are likely to be amongst the crucial economic aspects under consideration by the populace. 


Pandemic is a wildcard

The evolving pandemic situation is the biggest wildcard that the economy and world faces heading into 2022. India’s daily incremental Covid case count is back at Mar20 lows at the time of writing, besides a sharp fall in positivity and fatality rates. Total vaccination doses surpassed 1.2bn doses by late-Nov; 420mn have received both the vaccines. More than 70% of adult population can be fully vaccinated by Dec21 if the 3-4mn daily pace of second dose sustains. This alongside natural immunity (re seroprevalence) and better administrative capacity suggests the effect will be modest. The key risk, however, is the emergence of new variants, with high transmissibility, infectious and death risk characteristics, which might require governments to put in place localised restrictions or movement curbs, hurting recovery hopes. The bar for outright lockdowns remains high.  



USD/INR has been stable between 72 and 77 since the Covid-19 pandemic outbreak. Barring unforeseen shocks, especially the new Omicron Covid-19 variant, we expect the same trading range to be intact in 2022 and 2023. In 2022, we expect the USD to strengthen worldwide into the two Fed hikes we forecast for 4Q22. US President Joe Biden has declared fighting inflation a top priority. The Fed has responded by dropping the “transitory” tag for inflation, opening the door to end the tapering of asset purchases a few months earlier than planned before moving on to rate hikes. However, upward pressure on USD/INR should be mitigated by two rate hikes from the Reserve Bank of India, one in 3Q22 to 4.25% and another in 4Q22 to 4.50%. In November, RBI announced its intention to gradually reduce excess liquidity in the banking system and rebalance liquidity towards productive sectors. One downside risk for the INR is the trade deficit which has widened to USD139bn in January-October vs USD95bn in calendar 2020. The current account surplus in FY21 will reverse into deficits in FY22 and FY23 but they will be benign at 1.5% and 1.6% of GDP respectively. Another risk comes from Fitch placing India’s “BBB minus” long-term foreign currency debt rating on negative watch.



INR rates will be dictated by the pace of monetary normalisation that the Reserve Bank of India (RBI) is willing to allow and the increasing odds that India bonds may be included in major bond indices. While there is certainly a case for normalisation, INR swaps were pricing the RBI to unwind pandemic rate cuts too aggressively into 2022. That has changed. near-term worries about the Omicron variant are also weighing on INR rates. Slightly more caution from domestic investors and the correction in oil prices have also helped to pare external balance worries, driving rates lower from recent highs. We expect the repo rate to touch 4.50% by end-2022, a more restrained move compared to the already lowered 5% rate implied from the OIS space.

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Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]

Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]

Eugene Leow

Senior Rates Strategist - G3 & Asia
[email protected]

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