The Fitch Ratings logo  (REUTERS)
The Fitch Ratings logo (REUTERS)

Farmer income support, easier monetary policy may aid India's growth: Fitch

  • Fitch said it expects a further rate cut by the RBI
  • Fitch Ratings forecast a 7.1% growth for FY21

The government’s income support scheme for farmers and easing of regulatory policies and benchmark interest rates by the Reserve Bank of India (RBI) could help India’s economic growth gain momentum, Fitch Ratings Ltd. said in its latest global economic forecast.

The rating agency said it expects a further rate cut by the RBI and a recovery in portfolio inflows to support higher lending to private sector.

Fitch Ratings forecast a 7.1% growth for FY21, taking confidence from improved investment and better rural consumption. It, however, revised its FY20 growth forecast for India lower to 6.6% from an earlier 6.8% on account of contraction in bank and non-bank lending to private sector and the hit agriculture output has taken due to muted food price inflation. Official data showed that year-on-year growth in bank credit fell to 13.3% in March from 14.8% in February.

"We expect another 25 basis points cut later in 2019, which will push the policy repo rate down to 5.50%," the ratings agency said. The RBI earlier this month lowered its repo rate to 5.75% and changed its monetary policy stance to accommodative, leaving headroom for future rate cuts.

"Monetary and regulatory easing from the RBI, along with a recovery in portfolio inflows, should support a recovery in credit to the private sector and reverse the drag from the negative credit impulse. Food inflation has already started to pick back up (at 2% y-o-y in May) and the government has increased cash transfers to farmers in its latest budget, all of which should support rural households’ income and consumption," said Fitch Ratings in its forecast released on Monday.

It forecast a 7% growth rate for FY22.

One of the growth challenges India faces is the declining global economic growth rate in the wake of trade tensions. The International Monetary Fund in April downgraded its global economic growth estimate to 3.3% for 2019 from 3.5% projected in January. The RBI too, earlier this month in its second bi-monthly monetary policy statement for the current fiscal, said weak global demand due to escalating trade conflicts may further impact India’s exports and investment activity.