Ahead of the Reserve Bank of India (RBI)’s monetary review on Wednesday, rating agency Fitch on Monday said the central bank had headroom to "keep the policy rate low" to perk up the economy, which grew "weaker than expected" in the second quarter.
There is widespread expectation that the RBI would maintain status quo on the policy rate. Fitch, which assigns its lowest investment grade to India, recalled its earlier scaling down of India's economic growth estimate to 6.7 per cent for the current financial year from 6.9 per cent.
"Inflation is still running at low levels, weighed down by muted food price inflation. The rupee has also appreciated quite sharply against the dollar since the beginning of this year, despite a narrowing interest rate differential between the US Fed policy rate and the Reserve Bank of India's." These developments give headroom for RBI to keep interest rates low to help lift the economy.
However, retail food price inflation rose to 1.90 per cent in October from 1.25 per cent in the previous month, pushing up the rate of price rise to 3.58 per cent from 3.28 per cent. Inflation was still within the rate of four per cent, plus or minus two, mandated to the Monetary Policy Committee.
Fitch said it expected inflation to rise to 3.9 per cent by this month-end, compared with 3.4 per cent in the corresponding period previous year.
The rating agency said it had revised down India's economic growth to 6.7 per cent for the current financial year from 6.9 per cent in its September outlook. It said economic growth at 6.3 per cent in the second quarter of 2017-18 was weaker than what it expected, though it was a rebound compared with 5.7 per cent in Q1. It had also cut growth forecast to 7.3 per cent for 2018-19, from 7.4 per cent.
"Growth has repeatedly disappointed in recent quarters, although this has partly reflected one-off factors, including the demonetisation programme of November 2016 and disruptions related to the implementation of the goods and services tax in July 2017," it said.
Fitch said gradual implementation of the structural reform agenda was expected to contribute to higher growth in the next two years, as would higher real disposable income.
Recent moves by the government should help support the growth outlook and enhance business confidence, it said. "A two-year large bank recapitalisation plan (worth over Rs 2 lakh crore) for state banks was announced." The details are not clear yet but the package is likely to help address the capital shortages that have hindered banks’ lending.”
Second, the government unveiled a substantial road construction plan (worth Rs 6,90,000 crore or 4.5 per cent of GDP over five-years). "This may encourage the investment growth outlook," it added.