Here's why Fitch slashed growth forecast for India

Credit ratings agency Fitch Ratings is no longer as bullish on India’s economy as it was till recently. 

Fitch has slashed its India's economic growth forecast for current fiscal year to 7% from the previous estimate of 7.8%.

So, what exactly has Fitch said in its latest report on India?

Fitch said compared to its June forecast of 7.8% growth, it now expects the economy to grow 7% in 2022-23. It also slashed its forecast for next fiscal year to 6.7% from the earlier estimate of 7.4%. 

"The (Indian) economy recovered in 2Q22 with growth of 13.5% year-on-year (y-o-y), but this was below our June expectation of an increase of 18.5% y-o-y. Seasonally adjusted estimates show a 3.3% quarter-on-quarter (q-o-q) decline in 2Q22 though this seems to be at odds with high-frequency indicators. We expect the economy to slow given the global economic backdrop, elevated inflation and tighter monetary policy," Fitch said.

What did the ratings agency have to say about India’s central bank raising interest rates any further?

The Reserve Bank of India (RBI), Fitch believes, will continue raising the repo rate to 5.9% before the year-end. The RBI, it said, remains focused on reducing inflation, but said that its decisions would continue to be “calibrated, measured and nimble” and dependent on the unfolding dynamics of inflation and economic activity.

"We therefore expect policy rates to peak the near future and to remain at 6% throughout next year," the rating agency noted.

Is Fitch only slashing India’s growth outlook?

Not really. Globally, too, Fitch expects a slowdown. 

Fitch now expects world GDP to grow by 2.4% in 2022 – revised down by 0.5 percentage points since the June assessment – and by just 1.7% in 2023, compared with 2.7% earlier.

The Eurozone and the United Kingdom, Fitch said, are now expected to enter recession later this year. Fitch also forecasts that the US will suffer a mild recession in mid-2023.

The biggest forecast cuts, according to the report, have been to the Eurozone in response to the natural gas crisis. US growth has also been revised down to 1.7% in 2022 and 0.5% in 2023, down by 1.2 percentage points and 1.0 percentage point, respectively.

"The European gas crisis, high inflation and a sharp acceleration in the pace of global monetary policy tightening are taking a heavy toll on economic prospects. Fitch Ratings’ September 2022 Global Economic Outlook (GEO) includes deep and wide cuts to global GDP forecasts," wrote Brian Coulton and Pawel Borowski of Fitch in their latest assessment of global economy.

What does Fitch have to say about the role of quantitative easing during the pandemic?

On the role of QE in the pandemic, Fitch said, central bank policies are no longer supportive of fiscal easing to protect households and firms from economic shocks. With liquidity conditions tightening, large-scale fiscal easing could push up long-term real interest rates.

"Central banks are now much more concerned about inflation becoming entrenched, threatening the medium-term credibility of inflation targets. A de-anchoring of inflation expectations would require more aggressive tightening – with higher output costs – later on. Hence, they are now focused on using their monetary policy tools to bring down inflation, with the near-term impact on activity and jobs a secondary concern," Fitch said.