Fitch Ratings downgraded its 2022-23 growth forecast for India from 10.3% to 8.5% on Tuesday, citing sharply higher energy prices which it believes will spur inflation beyond 7% as oil companies eventually pass on price hikes to retail consumers.
“Global inflation is back with a vengeance after an absence of at least two decades. This is starting to feel like an inflation regime-change moment,” said Brian Coulton, Chief Economist, Fitch Ratings.
The rating firm also scaled up its inflation forecast for India. “Local fuel prices have been flat over the past weeks, but we assume that oil companies will eventually pass on higher oil prices to retail fuel prices (with some offset from a reduction in the excise duty by the government),” it noted.
“We now see inflation strengthening further, peaking above 7% in 3Q22, before gradually easing. We expect inflation to remain elevated throughout the forecast horizon, at 6.1% annual average in 2021 and 5% in 2022,” the agency said.
Noting that India’s GDP growth has been very strong in the September to December quarter of 2021, Fitch also raised its growth projection for 2021-22 to 8.7% from 8.1% earlier.
“Indian GDP is more than 6% above its pre-pandemic level, though it is still well below its implied pre-pandemic trend,” Fitch said in its Global Economic Outlook report, where it has pared its world GDP growth forecast for 2022 to 3.5% from 4.2%.
Emphasising that India’s monetary policy normalisation has been shallow till now, with the central bank prioritising the economic recovery over tackling inflation ‘amid a still-large output gap’, Fitch said it still expects the repo rate to rise to 4.75% by this December, from the present 4% level.
“The reverse repo rate – which has become the effective driver of money market rates since the start of the pandemic – is likely to be increased by a larger amount,” the agency said.
