Fitch Ratings has slashed India's GDP growth forecast to 7% in the financial year ending March 2023 (FY23) from 7.8% previously due to elevated inflation and tighter monetary policy.
The ratings agency expects the Indian economy to grow at 6.7% during the financial year 2023-24, lower than its earlier projection of 7.4%.
The GDP growth downgrade comes at a time when the Reserve Bank of India (RBI) has already front-loaded its policy rate rises, tightening by a total of 140 basis points since the start of 2022 to 5.4% in August.
"We expect the RBI to continue raising, to 5.9% before year-end. The RBI remains focused on reducing inflation, but said that its decisions would continue to be 'calibrated, measured and nimble' and dependent on the unfolding dynamics of inflation and economic activity. We therefore expect policy rates to peak the near future and to remain at 6% throughout next year," says Fitch Ratings.
Inflation moderated in August as crude oil prices eased but the risk to food inflation persists given negative seasonality towards the end of this year, Fitch says, adding that core inflation, which excludes food, fuel and light, remained elevated at 6%.
The RBI's latest survey of household inflation expectations eased in July, but expectations are still far above pre-pandemic levels. Destabilising inflation expectations could risk triggering second-round effects, according to the minutes of the RBI's August policy meeting.
While the RBI expects monthly inflation data to be volatile in the near term, its expectation is for CPI to ease towards the end of the year.
The downward revision of India's GDP forecast by Fitch comes days after Moody's Investors Service cut its forecast for real GDP growth to 7.6% for the year ending March 2023. Moody's, however, retained its sovereign rating on India at Baa3 with a stable outlook. The credit profile of India reflects key strengths including its large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt, Moody's said. The very large domestic market has provided strong demand-driven growth, helping to shelter the economy from fluctuations in external demand, it added.
Meanwhile, in an interview with Fortune India, Bibek Debroy, chairman, Economic Advisory Council to the Prime Minister, said there is no chance of 8-8.5% growth given what is happening globally.
"There is an issue with prices of oil or energy in general. And energy is something we cannot diversify overnight. We can have a transition over a period. The impact of current levels of oil prices on balance of payments is not that serious. We have enough (forex) reserves to handle it. However, it is showing in high consumer prices," Debroy said.
Inflation is clearly going to be higher than what one might have hoped, he said. "Higher does not mean alarmingly high. This kind of imported inflation is not amenable to monetary policy (interventions). I am not talking about food inflation, which is a periodic thing that will pass. So, we are in for a slightly higher rate of inflation," Debroy added.
