India’s growth pace is likely to moderate in the third quarter, even as the economy continues to show resilience despite tighter monetary policy and weakness in exports, Fitch Ratings said today.
The global rating agency left India’s fiscal 2024 growth aim unchanged at 6.3% and also said the world economy in 2023 is likely to grow faster than estimated earlier. However, the agency said the deepening slump in China’s property market is casting a shadow over global growth prospects.
Fitch raised its forecast for world growth in 2023 by 0.1 percentage point to 2.5%.
“We have raised US growth by 0.8pp to 2.0%, Japan by 0.7pp to 2.0% and EM ex. China by 0.5pp to 3.4%. This has more than offset a 0.8pp cut to China – to 4.8% – and a 0.2pp cut to the eurozone, to 0.6%,” Fitch said.
The differential between growth in EM ex. China and developed economies is expected to rise towards historical norms this year partly reflecting the earlier timing of the monetary policy tightening cycle in emerging markets, it added.
However, Fitch cut 2024 world growth forecast by 0.2pp to 1.9% with widespread downward revisions. They also lowered the US growth forecast by 0.2pp to 0.3%, the eurozone by 0.3pp to 1.1%, and both China and EM ex. China by 0.2pp to 4.6% and 3.0%, respectively.
“The previously hoped-for stabilization in China’s housing market has failed to materialize, and new sales could fall by a fifth this year. Housing is a third of investment and 12% of Chinese GDP and has strong multiplier impacts on the wider economy. Policy easing has been underwhelming to date, and export demand is falling,” it said.
Coming back to India, Fitch said high-frequency indicators point towards a potential slowdown in the growth rate of Asia’s third largest economy in the third quarter of 2023. This is expected due to declining exports, stagnant credit growth, and the recent bimonthly consumer confidence survey conducted by the Reserve Bank of India (RBI), which indicates slightly increased pessimism among consumers regarding their income and employment prospects.
“Temporary increases in inflation, in particular rising food inflation, in coming months could curb households’ discretionary spending power,” it said.
Fitch now expects retail inflation for 2023 at 5.5%, up from its previous forecast of 5%.
The inflation’s effects on consumers may be temporary, Fitch said, adding that there are more significant factors exerting pressure on the economy. India cannot remain insulated from the worldwide economic deceleration, and the domestic economy will feel the repercussions of the Reserve Bank of India’s (RBI) 250 basis points of interest rate hikes implemented over the past year. Additionally, the potential adverse impact of an unfavorable monsoon season could further complicate the RBI’s efforts to manage inflation.
Fitch maintained India’s policy rate forecast at 6.5% for the end of this (calendar) year, despite the risk of higher food prices.
