According to reports, Fitch Ratings on Tuesday said the Reserve Bank is likely to raise interest rates further to 5.9 percent by December 2022, on deteriorating inflation outlook.
In its update to Global Economic Outlook, Fitch said India’s economy faces a worsening external environment, elevated commodity prices, and tighter global monetary policy, the report said.
“Given the deteriorating outlook for inflation, we now expect the RBI to lift rates further to 5.9 percent by December 2022 and to 6.15 percent by the end of 2023 (vs. previous forecast of 5 percent) and to be unchanged in 2024,” Fitch said.
Last month in an unscheduled policy announcement, the Reserve Bank of India (RBI) raised rates by 40 basis points to 4.4 percent, and subsequently to 4.9 percent last week.
The RBI has forecast inflation to be 6.7 percent by the end of current fiscal.
The retail inflation for May came in at 7.04 percent.
“Inflation has risen to an eight-year high and broadens across more CPI categories, posing a severe challenge to consumers. In the past three months, food inflation has increased by an average of 7.3 per cent year-on-year, while healthcare bills are rising at a similar pace,” Fitch said.
According to Fitch, the April-June quarter growth is likely to improve on a rebound in consumption as COVID-19 cases subsided towards end-March, the report said.
“GDP grew by 4.1 percent year-on-year in 1Q22 (January-March) compared to our March forecast of 4.8 percent. We now expect the economy to grow by 7.8 percent this year (2022-2023), revised down from our previous forecast of 8.5 percent,” Fitch said.
Fitch had last week upped outlook on India’s sovereign rating to ‘stable’ from ‘negative’ after two years citing diminishing downside risks to medium-term growth on rapid economic recovery. The rating was kept unchanged at ‘BBB-‘.
“The Outlook revision reflects our view that downside risks to medium-term growth have diminished due to India’s rapid economic recovery and easing financial sector weaknesses, despite near-term headwinds from the global commodity price shock”, the report said.
The Indian economy grew 8.7 percent in the last fiscal and RBI expects growth to be 7.2 percent this fiscal.
Fitch said consumer spending sustaining the economy in 2022 given the potential for catch-up, as an easing in restrictions allows for greater spending on sectors such as retail, hotels and transport. Sectors of the economy that require greater face-to-face contact continue to lag behind others. (Business Standard)
