In a recent update, Fitch Ratings decided to maintain its growth forecast for India for the fiscal year 2023-24 (FY24) at 6.3%. Despite facing challenges such as tighter monetary policy and weakened exports, India’s economy displayed remarkable resilience. Notably, the Indian economy posted a strong growth rate of 7.8% in the April-June quarter, primarily driven by robust demand and a thriving services sector.
Optimistic Projections and Cautionary Inflation Signals
Fitch’s projections include a growth rate of 6.5% for the following fiscal year (2024-25). However, the report raises concerns about inflation risks. Fitch has revised its year-end inflation projection upwards, citing the looming threat of El Nino. It suggests that temporary increases in inflation, especially in food prices, could impact consumers’ discretionary spending power. Although the inflation’s impact on consumers might be short-lived, other fundamental factors are weighing on the Indian economy.
Moderation in Growth Expected
While India has exhibited resilience, Fitch’s September update of the Global Economic Outlook indicates a potential moderation in the pace of growth for the July-September quarter. Several factors contribute to this expectation, including weakening exports, stagnant credit growth, and a decrease in consumer confidence regarding income and employment prospects, as indicated by the Reserve Bank of India’s latest bimonthly survey.
Global Economic Concerns
Fitch also addresses global economic conditions, noting that the world economy is likely to grow slightly faster in 2023 than previously projected in June. However, the report points out concerns stemming from the deepening crisis in China’s property market and tightening monetary policies in the US and Europe, which could dampen demand.
Inflation and Monetary Policy
Despite the rise in inflation, particularly in food prices, Fitch maintains its forecast of a 6.5% benchmark interest rate set by the Reserve Bank of India until the end of 2023. The Indian government has responded to rising food prices by importing larger quantities of food, temporarily waiving import duties on wheat, and restricting sugar exports. The Reserve Bank of India expects that annual Consumer Price Index (CPI) inflation will moderate in the coming months, given the short-term nature of the vegetable price shocks.
El Nino and Future Inflation
However, Fitch warns that the threat of El Nino could potentially lead to inflation exceeding forecasts, although any impact on consumers and the overall economy is likely to be temporary. The report anticipates retail inflation to reach 5.5% by the end of 2023, which is higher than the previous forecast of 5%.