Fitch maintains its 6.3% growth forecast for India, highlights inflation risks

Fitch Ratings on Thursday maintained India's growth forecasting for the current fiscal at 6.3% but raised the year-end inflation projection on the El Nino threat, saying the Indian economy continues to demonstrate resilience despite tighter monetary policy and weak exports.

On the strength of solid demand and strong activity in the services sector, the Indian economy expanded 7.8% in the April–June quarter of the current fiscal year.

"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, while projecting 6.3% growth for the current fiscal, and 6.5% for the next fiscal.

However, high-frequency indications show that the pace of expansion in the July-September quarter is likely to moderate, according to Fitch's September update of the Global Economic Outlook.

According to Fitch, growth in the July-September quarter will likely moderate as exports remain weak, credit growth flatlines and consumers are becoming somewhat more pessimistic about their prospects for employment and income, according to the Reserve Bank of India's most recent bimonthly consumer confidence survey.

Regarding prices, it was stated that households' discretionary spending may be reduced by the short-term inflationary spikes, particularly the growing food inflation, in the upcoming months.

"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 August was 6.8 percent, down from 7.4% in July and 4.9% 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.

Despite the potential of increased prices for food, Fitch maintained its RBI benchmark interest rate forecasting for the end of the current calendar year at 6.5%.

The government reacted by increasing food imports (particularly tomatoes), temporarily eliminating the duty on wheat, and limiting sugar exports, it stated.

Given the short-term nature of vegetable price shocks, the RBI anticipates annual CPI inflation to moderate in the coming months.

"Nevertheless, the threat of El Nio means that inflation could exceed our forecasts, although the impact on consumers and the economy is likely to be temporary," Fitch said, adding it expects 2023-end retail or CPI inflation at 5.5%, higher than our previous forecast of 5%.