Fitch Ratings has maintained India's growth forecast for the current fiscal year at 6.3% while highlighting the country's economic resilience despite tighter monetary policies and export challenges. However, the rating agency has raised its year-end inflation projection due to the looming threat of El Nino. India's economy experienced robust growth of 7.8% in the April-June quarter of the current fiscal year, driven by strong activity in the services sector and robust demand.
Fitch stated, "The Indian economy continues to show resilience despite tighter monetary policy and weakness in exports, with growth outpacing other countries in the region." The rating agency projected a growth rate of 6.3% for the current fiscal year (April-March) and 6.5% for the next fiscal year.
In its September update of the Global Economic Outlook, Fitch noted that high-frequency indicators suggest a potential moderation in growth during the July-September quarter. This anticipated slowdown is attributed to weakening exports, stagnant credit growth, and a slight increase in pessimism among consumers regarding income and employment prospects, as indicated by the Reserve Bank of India's bimonthly consumer confidence survey.
Regarding inflation, Fitch mentioned that temporary increases, particularly in food inflation, could limit households' discretionary spending power in the coming months. However, it also highlighted more fundamental factors impacting the economy.
Fitch warned that India is not immune to the global economic slowdown, and the domestic economy may feel the lagged effects of the Reserve Bank of India's 250 basis points of interest rate hikes over the past year. Additionally, a poor monsoon season could complicate the RBI's efforts to control inflation.
Consumer price index-based retail inflation in India stood at 6.8% in August, following 7.4% in July and 4.9% in June. Fitch attributed this increase to sharp rises in the prices of items like tomatoes and other food products.
Despite the risks of higher food prices, Fitch maintained its 6.5% forecast for the RBI's benchmark interest rate until the end of 2023. The Indian government has taken measures to address rising food prices, such as increasing food imports and temporarily scrapping wheat import duties while restricting sugar exports.
Fitch acknowledged the RBI's expectations of moderation in CPI inflation in the coming months, primarily due to the short-term nature of vegetable price shocks. However, the looming threat of El Nino could potentially lead to inflation exceeding forecasts, although its impact on consumers and the economy is expected to be temporary. Fitch now expects retail inflation at the end of 2023 to be 5.5%, higher than its previous forecast of 5%.
Regarding global growth, Fitch noted that the world economy is expected to grow slightly faster in 2023 than previously projected in June. However, concerns about China's property market slump and tightening monetary policies in the US and Europe are casting shadows over global growth prospects.
Fitch Ratings Chief Economist Brian Coulton emphasized that the deepening slump in China's property market, once described as the "most important sector in the world," poses a new threat to global growth just as the impacts of rate hikes in the US and Europe are becoming more pronounced.
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