S&P said it forecast rate cuts of up to 75 basis points in India this fiscal. Photo: www.freepik.com

S&P Global Ratings on March 26 raised India’s growth forecast for the next financial year to 6.8%, but flagged restrictive interest rates as a dampener for economic growth.

The Indian economy is estimated to have clocked a growth of 7.6% in the current fiscal.

In November, last year, the U.S.-based agency had projected India’s growth to be 6.4% in 2024-25 fiscal on robust domestic momentum.

“For Asian emerging market [EM] economies, we generally project robust growth, with India, Indonesia, the Philippines, and Vietnam in the lead,” S&P said in its Economic Outlook for the Asia Pacific.

In largely domestic demand-led economies such as India, Japan, and Australia, the impact of higher interest rates and inflation on household spending power reduced sequential GDP growth in the second half, S&P said.

“We expect India’s real GDP growth to moderate to 6.8% in fiscal year 2025 [ending March 2025],” S&P said.

Restrictive interest rates are likely to weigh on demand next fiscal year, while regulatory actions to tame unsecured lending will affect credit growth. A lower fiscal deficit will also dampen growth, it added.

“Even as we expect a mild slowdown in Asian EM economies, we generally see solid domestic demand growth and a pick-up in exports to drive robust growth, with India, Indonesia, the Philippines and Vietnam in the lead,” S&P said.

It said high real policy rates will choke demand and are therefore likely to strengthen the case for lowering rates.

S&P said it forecast rate cuts of up to 75 basis points in India this fiscal. “In line with our projection for U.S. policy rates, we largely expect these moves to occur in the second half of the year,” it said.

In India, slowing inflation, a smaller fiscal deficit and lower U.S. policy rates will lay the ground for the Reserve Bank of India to start cutting rates. But we believe more clarity on the path of disinflation could push this decision at least to June 2024, if not later, S&P added.

Global rating agency Moody’s on March 4 raised India’s growth forecast for 2024 calendar year to 6.8%, from 6.1% estimated earlier, on the back of ‘stronger-than-expected’ economic data of 2023 and fading global economic headwinds.

India’s real GDP expanded 8.4% year-over-year in the fourth quarter of calendar year 2023, resulting in a 7.7% growth for full-year 2023.

“Capital spending by the government and strong manufacturing activity have meaningfully contributed to the robust growth outcomes in 2023,” Moody’s Investors Service said.

“With global headwinds fading, the Indian economy should be able to comfortably register 6-7% real GDP growth,” it added.

“India’s economy has performed well and stronger-than-expected data in 2023 has caused us to raise our 2024 growth estimate to 6.8% from 6.1%. India is likely to remain the fastest growing among G20 economies over our forecast horizon,” Moody’s said in its Global Macroeconomic Outlook for 2024. For 2025, the GDP growth is estimated at 6.4%.

The agency said high-frequency indicators show that the economy’s strong September and December quarter momentum carried into the March quarter of 2024.

“Robust goods and services tax collections, rising auto sales, consumer optimism and double-digit credit growth suggest urban consumption demand remains resilient. On the supply side, expanding manufacturing and services PMIs add to evidence of solid economic momentum,” Moody’s said.

This year’s interim Budget targets capital expenditure allocation of ₹11.1 lakh crore or 3.4% of GDP in 2024-25 (fiscal year 2025), 16.9% above the 2023-24 estimates. “We expect policy continuity after the general election and continued focus on infrastructure development,” Moody’s said.

The agency said while private industrial capital spending has been slow to pick up, it is expected to pick up with ongoing supply chain diversification benefits and investors’ response to the government’s Production Linked Incentive scheme to boost key targeted manufacturing industries.

“The year 2024 is an election year for several G20 countries including India, Indonesia, Mexico, South Africa (Ba2 stable), the U.K. and the U.S. Implications of elections can go beyond borders and economic and public policy in today’s increasingly fractious world,” it said.

“Leaders elected this year will influence domestic and foreign policies for the next four to five years. Businesses are accordingly responding to evolving geopolitical dynamics by reorganising supply chains and capital sources,” Moody’s said.

It said geopolitical realities will be influencing international trade flows, capital flows, international migration trends and international organisations in the years to come. Domestically, industrial and trade policies of several countries are intertwined with foreign policy.

New Delhi:

Fitch Ratings on Thursday retained India’s growth forecast for the current fiscal at 6.3 per cent saying the Indian economy continues to show resilience despite tighter monetary policy and weakness in exports, but upped year-end inflation projection on El Nino threat.

The Indian economy grew 7.8 per cent in the April-June quarter of current fiscal on strong services sector activity and robust demand.

“The Indian economy continues to show resilience despite tighter monetary policy and weakness in exports, with growth outpacing other countries in the region,” Fitch said, while projecting 6.3 per cent growth for current fiscal, and 6.5 per cent for next fiscal.

In its September update of the Global Economic Outlook Fitch, however, said that high-frequency indicators suggest that the pace of growth in the July-September quarter is likely to moderate.

Growth in the July-September quarter is likely to moderate as exports continue to weaken, credit growth flatlines and the Reserve Bank of India’s latest bimonthly consumer confidence survey shows consumers becoming a little more pessimistic on income and employment prospects, Fitch said.

On the price front, it said that the temporary increases in inflation, in particular rising food inflation, in coming months could curb households’ discretionary spending power.

“The inflation impact on consumers may be temporary but other more fundamental factors are weighing on the economy.

“India will not be immune to the global economic slowdown and the domestic economy will be affected by the lagged impact of the RBI’s 250bps of hikes in the past year, while a poor monsoon season could complicate the RBI’s control of inflation,” Fitch said.

Annual headline inflation was 6.8 per cent in August after 7.4 per cent in July and 4.9 per cent in June.

“The increase in inflation in recent months has been driven largely by a sharp increase in the price of tomatoes and other food products,” Fitch said.

Notwithstanding the risk of higher food prices, Fitch maintained its RBI’s benchmark interest rate forecast at 6.5 per cent for the end of this calendar year.

The government has reacted by importing greater quantities of food (especially tomatoes), temporarily scrapping the import duty on wheat and restricting sugar exports, it said.

The RBI expects annual CPI inflation to moderate in coming months given the short-term nature of vegetable price shocks.

“Nevertheless, the threat of El Niño means that inflation could exceed our forecasts, although the impact on consumers and the economy is likely to be temporary,” Fitch said, adding it expects 2023-end retail or CPI inflation at 5.5 per cent, higher than our previous forecast of 5 per cent.