Fitch expects 25 bps increase from RBI, cuts 2023-24 growth hopes to 6.2%

RBI will increase policy rate to 6.15% this month and retain this level through 2023, says the rating agency

Published - December 06, 2022 06:53 pm IST - NEW DELHI

Fitch Ratings on Tuesday pared its 2023-24 growth expectations for India to 6.2% from the 6.7% level it had predicted in September, with global growth expected to slip to just 1.4% in 2023 as opposed to 1.7% estimated earlier - the weakest expansion since 2008.

Ahead of the central bank’s monetary policy review to be unveiled on Wednesday, the global rating agency said it expects the Reserve Bank of India (RBI) to increase the policy rate to 6.15% this month and retain this level through 2023.

“The RBI has raised rates by a cumulative 190 basis points (bp) since the start of the tightening cycle in April 2022, lagging behind the Fed’s 350 bp increases over the same period,” the firm said in its Global Economic Outlook report for December. One basis point equals 0.01%. “The RBI has already intervened to support the rupee and further rate rises are likely to support the currency and to curtail underlying inflationary pressure,” it added.

“We now expect the RBI to increase policy rates to 6.15% by December and to then hold this rate throughout 2023,” it said, implying the bank’s monetary policy committee may opt for a slower 25 bps hike at its latest meeting whose decisions will be announced by RBI Governor Shaktikanta Das on Wednesday.

In September, the rating agency had said it expected India’s policy rates to peak in the ‘near future and remain at 6% throughout 2023.

Although retail inflation eased to 6.77% in October, core inflation edged up again after moderating over the summer and households’ inflation expectations remain high as food price inflation remains elevated, Fitch cautioned. “Weakness in the rupee against the US dollar is adding to inflationary concerns at the RBI given that a third of the CPI basket consist of imports,” it pointed out.

Fitch has retained its India GDP growth estimate for 2022-23 at 7%, noting that the economy’s 6.3% uptick in the second quarter was higher than its forecast of 5.5%. The July-to-September quarter was in fact, stronger than Fitch’s expectations for the world as a whole, leading it to revise 2022 global growth forecast upwards from 2.4% to 2.6%.

While India is shielded to some extent from global economic shocks given the domestically focused nature of its economy, it is not impervious to global developments, Fitch noted.

“The worldwide economic slowdown is expected to reduce demand for Indian exports and weakness is already evident in recent data – merchandise exports declined for the first time in almost two years including in textiles, petroleum products and engineering goods. Monetary policy tightening and high inflation have also contributed to a slowdown in imports, an easing in personal loan growth and falling purchasing power,” it added.

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