Fitch Ratings expects the Reserve Bank of India to start raising interest rates next year, as growth gains further traction and inflationary pressures tend to remain quite high.
“The minimum support price scheme for agricultural products and increased customs duties on certain products (such as electronics, textiles and auto parts) will boost prices against a backdrop of an accelerating growth. We expect inflation to hover a bit below 5% in 2018 and 2019 in the upper band of the Reserve Bank’s target,” Fitch said in its latest Global Economic Outlook.
Fitch expects India’s GDP to growth to reach 7.3% in fiscal 2018-19 and 7.5% in fiscal 2019-20.
The ratings firm noted that Inflation had increased quite sharply in recent months, rising from a 2017 mid-year low of 1.5% year-on-year to 5.2% last December, before easing back slightly to 4.4% in February 2018.
Accelerating food prices were the main cause of the pick-up in headline inflation. By contrast, fuel price increases had been contained by the government’s decision to roll back excise duties to keep pump prices stable in the face of rising oil prices, the rating agency said.
The firm also noted that Indian economy continued its bounce-back in the final quarter of 2017, growing 7.2% YoY.
The influence of one-off policy-related factors, which had been dragging down growth, had now waned, it noted.
Fitch also said that the money supply recovered to its pre-demonetisation level in mid-2017, and was now increasing steadily, similar to the previous trend. Meanwhile, disruptions related to the roll-out of the goods and services tax in July 2017 had gradually diminished, it said.
The budget for FY18-19, unveiled in February, envisaged a slower pace of fiscal consolidation and, therefore, should support the near-term growth outlook, according to the firm.
It contained measures that would benefit low-income earners (such as a minimum price support and free health insurance) and support rural demand, Fitch said.
The government also planned to ramp up infrastructure outlays, in particular by state-owned enterprises. Those policies came on top of a substantial road construction plans and a bank recapitalisation plan announced late last year. These should also provide some support to growth in the medium-term, it added.
