Fitch Ratings on Thursday, September 15, 2022, slashed its growth forecast for the Indian economy to 7% in 2022-23 from 7.8%, with 2023-24 growth to slow further to 6.7% from 7.4% projected before.
Fitch also slashed global growth forecasts to 2.4% for 2022 from 2.9% in view of the European gas crisis, high inflation and a sharp acceleration in the pace of global monetary policy tightening that is taking a heavy toll on economic prospects.
Also read: India, 7% plus annual growth, and the realities
Recession in U.K. and U.S. expected
“The eurozone and UK are now expected to enter recession later this year and Fitch forecasts that the US will suffer a mild recession in mid-2023,” Fitch said in its latest global economic outlook.
While India’s economy registered a 13.5% growth in the April to June quarter, the ratings agency said this was below its expectation of an 18.5% surge in growth. “Seasonally adjusted estimates show a 3.3% quarter on quarter decline though this seems to be at odds with high-frequency indicators,” it noted, citing improvements in Purchasing Manager Indices and industrial growth through the quarter.
“The manufacturing PMI index also recovered strongly in July and remained upbeat in August, with the Reserve Bank of India (RBI) saying that “domestic activity remains resilient.” Nevertheless, we expect the economy to slow given the global economic backdrop, elevated inflation and tighter monetary policy,” the firm said.
Even though inflation moderated in August, the risk to food inflation persists, Fitch cautioned. “Core inflation, which excludes food, fuel and light, remained elevated at 6% while inflation expectations have also stayed high. The RBI’s latest survey of household inflation expectations eased in July, but expectations are still far above pre-pandemic levels,” it pointed out.
“Destabilising inflation expectations could risk triggering second-round effects, according to the minutes of the RBI’s August policy meeting. While the RBI expects monthly inflation data to be volatile in the near term, its expectation is for the Consumer Price Inflation to ease towards the end of the year,” the rating agency said.
Fitch expects the central bank, which has already tightened the policy rate by 140 basis points since the beginning of this year to 5.4% in August, to continue with hikes in order to take the rate to 5.9% by the end of the year.
“The RBI remains focused on reducing inflation, but said that its decisions would continue to be “calibrated, measured and nimble” and dependent on the unfolding dynamics of inflation and economic activity. We therefore expect policy rates to peak the near future and to remain at 6% throughout next year,” Fitch concluded.
