Fitch expects RBI to raise interest rates to 5.9% by December-end

Fitch Ratings on Tuesday said the Reserve Bank was likely to raise interest rates further to 5.9% by December 2022, on deteriorating inflation outlook.

In its update to the Global Economic Outlook, Fitch said India’s economy faced 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% by December 2022 and to 6.15% by the end of 2023 (versus a previous forecast of 5%) 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%, and subsequently to 4.9% last week.

The RBI has forecast inflation to be 6.7% by the end of current fiscal.

Retail inflation for May came in at 7.04%, while wholesale price-based inflation spiked to a record 15.88%.

“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% year-on-year, while healthcare bills are rising at a similar pace,” the agency said.

According to Fitch, the April-June quarter growth is likely to improve on a rebound in consumption as COVID-19 cases had subsided towards end-March.

“GDP grew by 4.1% year-on-year in [January-March] compared to our March forecast of 4.8%. We now expect the economy to grow by 7.8% this year (2022-2023), revised down from our previous forecast of 8.5%,” Fitch said.

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

Fitch had last week raised the 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-‘.

It said higher borrowing costs were also likely to affect consumers although recent cuts to fuel excise duties and increased fertiliser subsidies will provide some small reprieve. India’s economy also faces a worsening external environment, elevated commodity prices, persistent supply bottlenecks and tighter global monetary policy.

Fitch said WPI at close to 16% year-on-year could result in higher costs being passed on to consumers as demand for services increases.

“We see 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,” it added.

Referring to the global inflation situation, Fitch said inflation pressures continued to intensify, with increasingly adverse implications for the growth outlook. Recent COVID-19-related lockdowns in China were adding to global manufacturing supply-chain pressures. Energy and food supply disruptions from the Russia-Ukraine war were having a swifter impact on European inflation than expected.

Stating that the world growth prospects had deteriorated, Fitch cut its world GDP growth forecast for 2022 by 0.6 percentage points from the March 2022 Global Economic Outlook (GEO) to 2.9%.

The biggest revision is to China, where growth is expected at 3.7% this year, lower than the 4.8% projected in March. “The lockdown in Shanghai will cause China’s GDP to fall in sequential quarterly terms in 2Q22 (April-June) and with the ‘dynamiczero’ COVID-19 policy still in place, we do not expect there to be a swift bounce back,” Fitch said.

Eurozone consumers would experience a greater drag on real incomes from inflation, and German industry is being affected by supply-chain disruptions and the China slowdown.

The U.S. economy has near-term momentum, with consumer spending supported by strong growth in jobs and nominal wages. But growth is set to slow from mid-2023 to barely positive rates in quarterly terms due to aggressive monetary tightening, it added.