Fitch ups FY25 GDP growth forecast to 7.2%

“We expect the Indian economy to expand by a strong 7.2 per cent in FY24/25 (an upward revision of 0.2 percentage point from the March GEO). Investment will continue to rise but more slowly than in recent quarters, while consumer spending will recover with elevated consumer confidence,” Fitch said in a report. Purchasing managers’ survey data point to continued growth at the start of the current financial year, it said.

“In the final quarter of the financial year ended March 2024 (FY23-24), real GDP increased by 7.8 per cent year-on-year. This was higher than we had expected in March, although slower than previous quarters of the financial year,” Fitch said.

For FY23-24, real GDP expanded 8.2 per cent (March GEO; 7.8 per cent), with domestic demand the driver of growth, and investment rising by 9.0 per cent and consumer spending by 4.0 per cent. “Falling indirect taxes net of subsidies have boosted GDP growth relative to gross value-added at basic prices,” it said, adding, “the latter is currently a better guide to underlying momentum and has been growing at just over 7 per cent.”

“Signs of the coming monsoon season being more normal should support growth and make inflation less volatile, though a recent heatwave poses a risk. We expect growth in later years to slow and approach our medium-term trend estimate. We forecast real GDP growth of 6.5 per cent in FY25-26 (unchanged from March), and 6.2 per cent in FY26-27, driven by consumer spending and investment,” it said.

Consumer price inflation has only edged down since the start of the calendar year, with annual inflation at 4.7 per cent in May from 5.7 per cent in December 2023. Core inflation has fallen at a steadier pace (to 3.0 per cent in May from 3.8 per cent in December) and food price inflation has remained high (averaging 7.8 per cent in the first five months of the calendar year). According to official forecasts, rainfall during June September is likely to be above average. “This should limit the inflationary risks from food price spikes. We expect headline inflation to continue declining to 4.5 per cent by calendar year-end, and average 4.3 per cent in 2025 and 2026, staying slightly above the midpoint of its target range (4 per cent +/- 2 per cent),” Fitch said.

At its latest meeting, the RBI maintained the policy rate at 6.5 per cent and confirmed its hawkish stance of “withdrawal of monetary accommodation” and the need to bring down inflation towards target. “We still expect the RBI to cut its policy rate this year, but only once, to 6.25 per cent. In the March GEO we expected 50bp of cuts this year. We then expect 25bp of cuts in both 2025 and 2026,” Fitch said.

The MPC decision to hike GDP growth forecast to 7.2 per cent was on the back of improving rural and urban demand conditions buoyed by monsoon forecast. The central bank upgraded its quarterly forecast for growth as well, with Q1, Q2, Q3 and Q4 now expected to grow at 7.3 per cent, 7.2 per cent, 7.3 per cent and 7.2 per cent respectively.

“During 2024-25, so far, the domestic economic activity has maintained resilience. Manufacturing activity continues to gain ground on the back of strengthening domestic demand. The 8 core industries posted healthy growth in April 2024. Purchasing Managers Index, that is PMI in manufacturing, continued to exhibit strength in May 2024 and it is indeed the highest globally,” RBI Governor Shaktikanta Das said in the policy review.

Das said manufacturing continued to exhibit strength in May 2024 and is the highest globally. Services sector maintained buoyancy as evident from available high frequency indicators. PMI services stood strong at 60.2 in May 2024 indicating continued and robust expansion in activity.