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Published: Apr 12, 2023
Updated: Apr 12, 2023

IMF lowers India's growth forecast for FY24 to 5.9% due to global banking crisis

The International Monetary Fund (IMF) has cut India's growth forecast for 2023-24 (FY24) by 20 basis points to 5.9%, citing historical revisions to data and the impact of the global banking crisis. The projection is the lowest among any multilateral development bank, with the World Bank and Asian Development Bank forecasting growth at 6.3% and 6.4%, respectively. The IMF also projected India's retail inflation to ease to 4.9% in FY24 from 6.7% in FY23, with the current account deficit to come down to 2.2% of GDP from 2.6% estimated the previous year.

IMF chief economist Pierre-Olivier Gourinchas cautioned that a sharp tightening of global financial conditions could have a dramatic impact on credit conditions and public finances, particularly in emerging markets and developing economies. He added that stronger-than- expected demand might require monetary policy to tighten further or stay tighter for longer to maintain price stability.

Why was India's growth forecast reduced?

The cut in India's growth forecast is due to "a set of historical revisions," according to Daniel Leigh, division chief, research department at the IMF. "We realised that 2020 and 2021 have actually been a lot better than we thought. So actually there is less room for catching up, and that pent-up demand from consumption, which was informing our previous forecast, is therefore going to be less because they have already had more catching up before," Leigh said. He added that India remains one of the bright spots in the global economy, with growth expected to rebound to 6.3% in FY25.

What does the report say about emerging market economies?

The report suggests that emerging market economies should allow their currencies to adjust as much as possible, and foreign exchange interventions may be appropriate on a temporary basis if currency movements and capital flows substantially raise financial stability risks. The IMF also warned that a severe downside scenario could see global GDP per capita falling, an outcome whose probability is estimated at around 15%.

Banking crisis may fuel a global contagion

Despite being a bright spot in the global economy, India's growth forecast for FY24 has been reduced to 5.9% due to historical revisions to data and the impact of the global banking crisis. The IMF has projected India's retail inflation to ease and the current account deficit to come down. The report also warns of a severe downside scenario and suggests that emerging market economies should allow their currencies to adjust as much as possible