Fitch Ratings on Thursday retained India’s growth forecast for the current fiscal at 6.3 per cent saying the Indian economy continues to show resilience despite tighter monetary policy and weakness in exports, but upped year-end inflation projection on El Nino threat.
The Indian economy grew 7.8 per cent in the April-June quarter of current fiscal on strong services sector activity and robust demand.
“The Indian economy continues to show resilience despite tighter monetary policy and weakness in exports, with growth outpacing other countries in the region,” Fitch said, while projecting 6.3 per cent growth for current fiscal, and 6.5 per cent for next fiscal.
In its September update of the Global Economic Outlook Fitch, however, said that high-frequency indicators suggest that the pace of growth in the July-September quarter is likely to moderate.
Growth in the July-September quarter is likely to moderate as exports continue to weaken, credit growth flatlines and the Reserve Bank of India’s latest bimonthly consumer confidence survey shows consumers becoming a little more pessimistic on income and employment prospects, Fitch said.
On the price front, it said that the temporary increases in inflation, in particular rising food inflation, in coming months could curb households’ discretionary spending power.
“The inflation impact on consumers may be temporary but other more fundamental factors are weighing on the economy.
“India will not be immune to the global economic slowdown and the domestic economy will be affected by the lagged impact of the RBI’s 250bps of hikes in the past year, while a poor monsoon season could complicate the RBI’s control of inflation,” Fitch said.
Annual headline inflation was 6.8 per cent in August after 7.4 per cent in July and 4.9 per cent in June.
“The increase in inflation in recent months has been driven largely by a sharp increase in the price of tomatoes and other food products,” Fitch said.
Notwithstanding the risk of higher food prices, Fitch maintained its RBI’s benchmark interest rate forecast at 6.5 per cent for the end of this calendar year.
The government has reacted by importing greater quantities of food (especially tomatoes), temporarily scrapping the import duty on wheat and restricting sugar exports, it said.
The RBI expects annual CPI inflation to moderate in coming months given the short-term nature of vegetable price shocks.
“Nevertheless, the threat of El Nio means that inflation could exceed our forecasts, although the impact on consumers and the economy is likely to be temporary,” Fitch said, adding it expects 2023-end retail or CPI inflation at 5.5 per cent, higher than our previous forecast of 5 per cent.
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