Fitch Ratings has revised India's GDP growth projections to 7.5 per cent from 7.7 per cent, for FY 2011-12 and to 8 per cent from 8.2 per cent for FY 2012-13 on the back of deteriorating global growth prospects.
In its latest quarterly Global Economic Outlook, Fitch said that growth forecasts for all major advanced economies (MAE) were being revised downwards as Q2 2011 were weaker than previously forecast by Fitch. MAE growth has been stalling at rates not seen since 2009, the report said.
According to Fitch, despite having more robust growth prospects, 2011 and 2012 GDP forecasts for Brazil, Russia, India, and China have been revised downwards, signalling that emerging markets will not de-couple from MAEs.
Growth in India
India has hit a difficult part of the cycle with growth and inflation heading in opposite directions. Real GDP moderated for the third consecutive quarter, rising 7.7 per cent year-on-year in Q2 2011, down from a 7.8 per cent y-o-y rise in Q1 2011.
“It appears that the combination of rising inflation and interest rates has taken a toll on the Indian consumer. Private consumption rose 6.3 per cent y-o-y in Q2 2011, down from an 8 per cent y-o-y increase in Q1 2011. While India is not a trade-oriented economy, the deterioration in global growth prospects will have knock-on effects,'' Fitch said.
Inflation
Inflation is persistent. The headline measure of inflation, the wholesale price index (WPI), rose 9.8 per cent y-o-y in August 2011, up from 9.2 per cent y-o-y in July. Inflation is likely to remain high as commodity prices show no signs of abating and the rupee fell 6.4 per cent against the US dollar since end-June.
RBI may take cautious approach
High inflation means that the RBI may still need to tighten monetary policy despite raising its benchmark rates 12 times since early 2010.
Even after the RBI raised its key repurchase rate by 25 basis points to 8.25 per cent on September 16, real interest rates (adjusted by WPI) remain negative. However, it is reasonable to expect that the RBI will take a more cautious approach in the coming months given the deterioration in the global economy, Fitch said.