Fitch keeps India’s growth forecast at 6.3%, but warns about inflation

Fitch Ratings on Thursday (September 14) retained India's growth forecast for the current fiscal at 6.3 per cent, saying its economy continues to show resilience but upped year-end inflation projection on El Nino threat.

The Indian economy grew by 7.8 per cent in the April-June quarter of 2023-24 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.

It projected 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, however, Fitch said that high-frequency indicators suggest that the pace of growth in the July-September quarter was likely to moderate.

This would be so 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, it said.

Food inflation

On prices, Fitch said, 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 in India 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.

But despite the risk of higher food prices, Fitch maintained its RBI's benchmark interest rate forecast at 6.5 per cent for the end of 2023.

Indian curbs

The Indian government has reacted by importing greater quantities of food (especially tomatoes), temporarily scrapping the import duty on wheat and restricting sugar exports.

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 Niño means that inflation could exceed our forecasts, although the impact on consumers and the economy is likely to be temporary," Fitch said.

It said it expects 2023-end retail or CPI inflation at 5.5 per cent, higher than our previous forecast of 5 per cent.

(With agency inputs)