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    Fitch slashes India GDP forecast to 8.4% for current fiscal

    Synopsis

    Says new variant Omicron poses a new risk to the recovery; only one-third of population fully vaccinated

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    In October, the agency had forecasted a GDP growth of 8.7 per cent in FY22 and 10 per cent in FY23.
    Fitch Ratings on Wednesday slashed India’s economic growth forecast to 8.4% for the current financial year given that less than one-third of the population is fully vaccinated and new Omicron variant poses a new risk to the recovery. However, it raises India growth projection to 10.3% for the next financial year.

    “We have cut our FY22 (financial year ending March 2022) GDP growth forecast, to 8.4%. GDP growth momentum should peak in FY23, at 10.3%, boosted by a consumer-led recovery and the easing of supply disruptions," Fitch said in its Global Economic Outlook. Added that, risks to the recovery remain, especially in the near term, given that less than one-third of the population is fully vaccinated. The newly discovered Omicron variant has added to risks, it said.

    In October, the agency had forecasted a GDP growth of 8.7 per cent in FY22 and 10 per cent in FY23.

    In the latest report, Fitch said that India’s GDP grew 11.4% in the July-September quarter over April-June quarter of the current fiscal on a seasonally adjusted basis. Economy has contracted 12.4% in the April-June quarter over the fourth quarter of the previous financial year.

    However, the bounce was more subdued than we expected in our September outlook. The rebound in the services sector was weaker than hoped for, Fitch noted.

    It says that business surveys and mobility data point to activity growing robustly in October-December quarter. Though growth in the manufacturing sector is constrained by ongoing supply shortages, but we expect these supply bottlenecks to ease in the coming months.

    Besides, the agency expect the services sector to show a strong reading amid the lifting of most restrictions. Given that carmakers are signalling a ramp-up of production while domestic coal production is increasing to make up for shortages.

    On Inflation front, rating agency expects headline inflation to average 4.9% in 2022 and 4.2% in 2023, from 5% in 2021, amid moderate food inflation.

    “We still expect the Reserve Bank of India (RBI) to start raising interest rates in 2022, by 75 basis point beginning in January-March quarter.

    Still a large negative output gap and inflation close to the midpoint target should allow the RBI to lag many other emerging markets peers in the interest rate-normalisation process, it said added that however, the central bank will continue to roll out liquidity withdrawal auctions to reduce excess liquidity in the banking system.

    The agency further said that inflation has consistently hovered above the upper-band of the Reserve Bank of India (RBI)’s 2%-6% target since the onset of the pandemic, initially pushed up by pandemic-related disruption to local supply chains, boosting food prices.

    In turn, core price pressures (excluding food and energy) have been gradually rising: core inflation has hovered around 6% in recent months. However, in contrast to many other emerging markets, food inflation has edged down markedly over the past months, helping to contain overall inflationary pressures.


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