India's economy faces a worsening external environment: Fitch

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.

"Given the deteriorating outlook for inflation, we now expect the RBI to lift rates further to 5.9 per cent by December 2022 and to 6.15 per cent by the end of 2023 (vs. previous forecast of 5 per cent) 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 per cent, and subsequently to 4.9 per cent last week.

"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.

"GDP grew by 4.1 per cent year-on-year in 1Q22 (January-March) compared to our March forecast of 4.8 per cent. We now expect the economy to grow by 7.8 per cent this year (2022-2023), revised down from our previous forecast of 8.5 per cent," 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," it said.

The Indian economy grew 8.7 per cent in the last fiscal and RBI expects growth to be 7.2 per cent 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.