Fitch Ratings has cut its GDP growth forecast for India for 2022-23 by a massive 180 basis points to 8.5 percent on the back of soaring global energy prices.
For FY22, however, the ratings agency has raised its outlook to 8.7 percent - 60 basis points above its December estimate. The hike in the FY22 GDP growth estimate comes after the Indian economy rode out the Omicron variant-led third COVID-19 wave "with little damage", Fitch noted.
The revised growth forecast for FY23 is still higher than what is expected by the Reserve Bank of India (RBI). The central bank sees India's GDP growing 7.8 percent next financial year, with the statistics ministry predicting an 8.9 percent growth for this year.
The cut in next year's growth forecast for India is part of a downward revision on a global scale, with the projection for global growth in 2022 lowered to 3.5 percent from 4.2 percent. The global economy is also seen growing at a slower rate of 2.8 percent in 2023 as against 3 percent forecast earlier.
Global inflation is back with a vengeance after an absence of at least two decades. This is starting to feel like an inflation regime-change moment," warned Brian Coulton, the chief economist at Fitch.
Global commodity prices, particularly those of energy, have been on the rise since Russia launched its assault on Ukraine late last month.
"A potentially huge global supply shock that will reduce growth and push up inflation is hitting the post-COVID-19 pandemic recovery. Russia's invasion of Ukraine and the economic sanctions on Russia that have followed have put global energy supplies at risk. Sanctions seem unlikely to be rescinded any time soon," Fitch said.
| FITCH'S KEY GROWTH FORECASTS |
| 2022 | 2023 |
| Global growth | 3.5% | 2.8% |
| US | 3.5% | 1.6% |
| Eurozone | 3.0% | 2.3% |
| China | 4.8% | 5.1% |
| India | 8.7% (FY22) | 8.5% (FY23) |
| Russia | -8.0% | -0.2% |
As per the latest forecasts, Fitch expects the Russian economy to shrink by 8 percent in 2022 followed by another 0.2 percent contraction in 2023.
"This forecast drop in activity is comparable to that during the country's 1998 financial crisis, and then in the global financial crisis. The sanctions-related shock looks much larger in many respects – and will certainly last longer – but high oil prices, military spending and the pre-war current account surplus could provide some cushion," Fitch said.
The agency expects global oil prices to remain elevated for a while. It has forecast an average price of $100 per barrel for 2022 - up from $70 - and $80 per barrel for 2023.
Fitch has, consequently, set the inflation estimate sharply higher. For the US, retail inflation is seen averaging 7 percent in 2022, up from 4.5 percent forecast in December. For the Eurozone, Fitch expects inflation to average 5 percent this calendar year, nearly twice that of its previous forecast of 2.6 percent.
In India, the Consumer Price Index (CPI) inflation is seen at 4.6 percent at the end of FY23 and 5 percent at the end of FY24. According to Fitch, the monetary policy normalisation by the RBI has been "very shallow" so far.
"The Reserve Bank of India has prioritised the economic recovery over tackling inflation amid a still-large output gap. We still expect the repo rate to rise to 4.75 percent by December, from 4 percent. The reverse repo rate – which has become the effective driver of money market rates since the start of the pandemic – is likely to be increased by a larger amount," Fitch said.