The ratings firm has projected inflation to hit 5.5% this year, up half a percentage point from its previous forecast.
Earlier this week, S&P retained its forecast for India’s economic growth at 6% for FY24 and 6.9% for the subsequent two years.
“The risks are fairly balanced, especially on growth. In fact, growth could come in higher given that the domestic economy remains fairly strong,” Rana stated, pointing out that the external environment and inflation could dampen growth.
The ratings firm has projected inflation to hit 5.5% this year, up half a percentage point from its previous forecast.
While the economist noted that the upcoming elections were likely to have a marginal impact on inflation, he was hopeful they would not lead to fiscal profligacy.
“There were no signs yet of a bent towards populist measures,” he stated. However, Rana did highlight that there was a need to create fiscal space to support growth in the medium term.
“The fiscal space is significantly limited, and the state governments are quite stretched in terms of ability to spend,” Rana pointed out.
While the country is on the path to achieving 7% growth in the near term owing to resilient consumption activity and expectations of an improvement in external conditions from next year onwards, targeting more than 7% growth is a challenge for now.
Policy continuity, higher labour force participation and access to international markets were listed as policy imperatives for sustaining growth in the long term.
“I think there’s a number of free trade negotiations that are in progress and some that have been signed. Indian firms are very competitive in some sectors. There’s also the supply chain diversification dynamic that is going on; we have seen some improvement in FDI,” Rana said, noting a need to continue on this path.
The economist raised concerns about declining net household financial savings. He said the income growth needed to pick up for forecasts to hold.
“We anticipate that incomes are likely to pick up going forward while the savings rate remains at current levels without deteriorating further,” Rana said.
The economist also noted that despite the uptick in inflation, price concerns were not enough for the Reserve Bank of India to raise rates.
Experts indicate that inflation is likely to slow below 6% in September, following the drop in tomato prices and a Rs 200 cut in the price of cooking gas cylinders.
The RBI’s monetary policy committee is widely expected to hold the policy rate at 6.5% for the fourth consecutive time at next week’s meeting.
S&P has projected a 0.25 percentage point cut in rates in FY25, which Rana said would likely be delivered in the August meeting.
“We have a global theme of easing interest rates in H2 of next year, which means that the RBI would cut potentially in August,” Rana said, stating that lower food inflation in the last quarter of FY24 could advance the rate cut to April.
