Mumbai, October 3, 2023 – Fitch Ratings has reaffirmed its growth projection for India in the current fiscal year at 6.3 percent, citing the country’s remarkable resilience in the face of tightening monetary policies and export weaknesses. However, Fitch also revised its year-end inflation forecast upwards, primarily due to concerns about the El Nino weather phenomenon.
The Indian economy showcased its strength by achieving a growth rate of 7.8 percent during the April-June quarter of the current fiscal year, driven by a robust services sector and strong demand.
Fitch acknowledged India’s economic vigor, stating, “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 has projected a growth rate of 6.3 percent for the current fiscal year and 6.5 percent for the next fiscal year. However, Fitch did express concerns that the pace of growth in the July-September quarter might moderate based on high-frequency indicators.
Several factors contribute to this potential slowdown. Weakness in exports, stagnant credit growth, and a slight dip in consumer confidence, as per the Reserve Bank of India’s latest bimonthly survey, are among the primary reasons cited by Fitch. These factors, coupled with the prospect of rising inflation, could impact households’ discretionary spending.
While Fitch acknowledges that the inflation increase may be temporary and largely attributed to soaring food prices, it underscores the presence of more fundamental challenges that the Indian economy faces. India is not immune to the global economic slowdown, and the domestic economy might bear the brunt of the Reserve Bank of India’s (RBI) 250 basis points of rate hikes over the past year. Additionally, a disappointing monsoon season could complicate the RBI’s efforts to control inflation.
Annual headline inflation in India stood at 6.8 percent in August, following 7.4 percent in July and 4.9 percent in June. Fitch explained, “The recent surge in inflation is primarily driven by a sharp escalation in the prices of items like tomatoes and other food products.”
Despite the risk of higher food prices, Fitch has maintained its benchmark interest rate forecast for the RBI at 6.5 percent by the end of this calendar year. The Indian government has taken measures to mitigate food price concerns by increasing food imports, particularly for items like tomatoes. Additionally, it temporarily removed import duties on wheat and imposed restrictions on sugar exports.
The RBI anticipates that annual Consumer Price Index (CPI) inflation will ease in the coming months, given the short-term nature of price spikes in vegetables. Nevertheless, the looming threat of El Nino, a climate phenomenon that can disrupt weather patterns and agriculture, could lead to inflation surpassing forecasts. Fitch indicated that while the impact on consumers and the economy might be temporary, it anticipates year-end retail or CPI inflation for 2023 to reach 5.5 percent, slightly higher than its previous projection of 5 percent.
In conclusion, Fitch Ratings has affirmed India’s resilient economic growth, despite several challenges such as tightening monetary policies, export weaknesses, and rising inflation concerns. The country’s ability to navigate these obstacles will be closely monitored, and the impact of these factors on India’s economic trajectory will continue to be a topic of keen interest for policymakers, investors, and analysts in the months ahead.
