Fitch Ratings on Thursday maintained India’s growth forecast for the current fiscal at 6.3 percent, saying the Indian economy continues to show resilience despite tighter monetary policy and weakness in exports, but raised its year-end inflation projection on the El Nino threat.
The Indian economy grew 7.8 per cent. in the April-June quarter of the current fiscal due to strong activity in the service sector 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, forecasting growth of 6.3 percent for the current fiscal and 6.5 percent for the next fiscal policy.
However, in its September update of the Global Economic Outlook, Fitch said that high-frequency indicators suggest that the pace of growth in the July-September quarter is likely to slow.
Growth in the July-September quarter is likely to slow as exports continue to weaken, credit growth flatlines and the Reserve Bank of India’s latest bi-monthly consumer confidence survey shows consumers becoming slightly more pessimistic about income and employment prospects, Fitch said.
On the price front, it said the temporary increases in inflation, especially rising food inflation, could dampen household discretionary spending in the coming months.
“The inflationary 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 effect 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.
The total annual 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 mainly driven by a sharp increase in the price of tomatoes and other food items,” Fitch said.
Despite the risk of higher food prices, Fitch maintained its RBI’s benchmark interest rate forecast at 6.5 percent for the end of this calendar year.
The government has responded by importing larger quantities of food (particularly tomatoes), temporarily scrapping import duties on wheat and limiting sugar exports, it said.
The RBI expects annual CPI inflation to moderate in the coming months due to the short-term nature of vegetable price shocks.
“Nevertheless, the threat of El Niño means that inflation could exceed our forecasts, although the impact on consumers and the economy is likely to be temporary,” Fitch said, adding that it expects retail or CPI inflation in 2023 to be 5.5 percent, higher than our previous forecast of 5 percent.
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