Fitch revises growth forecast

Though India’s domestic growth has shown good momentum over the last two quarters, Fitch said the tightening of monetary policy and rising global crude oil prices are likely to limit the upside to growth. Earlier in March, it had revised up its forecast for FY19 growth to 7.4 per cent from 7.3 per cent.

“However, higher financing costs (stemming from monetary tightening and higher market premiums) and a rising oil price should limit the upside to growth. The RBI responded to rising underlying inflationary pressure and a closing output gap by hiking its policy rate by 25 basis point at its June meeting, somewhat earlier than we expected,” it said.

Inflation has picked up since mid-2017, despite food inflation being muted. The rise in the oil price and the rupee depreciation according to Fitch should add to price pressure in the coming months, although it expects inflation to be contained within the upper band of the RBI’s target range.

The rating agency noted that the rupee has been one of the worst performing currencies in Asia this year, although the depreciation was more muted than during the 2013 taper-tantrum episode.

India has better macroeconomic fundamentals than in 2013 and very low foreign ownership rates in the domestic government bond market, but the current account deficit has been widening as a result of rising oil prices, reviving domestic demand and poor manufacturing export performance.

“The acceleration was underpinned by a sharp pick-up in investment and government consumption. However, export growth weakened while import growth kept growing at a fast clip,” Fitch observed.