S&P Global Ratings, a global ratings agency, expects the Reserve Bank of India (RBI) to raise its already high policy rate further following a recent upside surprise to inflation. 

In its latest quarterly update for the Asia-Pacific region, this global rating agency expects the Consumer Price Index (CPI) inflation for 2023-24 to moderate to 5 per cent from 6.8 per cent in current fiscal even as it anticipates upside risks, including from weather related factors. 

Since May last year, RBI has been hiking its repo rate (rate at which it lends money to banks) from 4 per cent then to 6.5 per cent now. The MPC had hiked the repo rate by 40 bps in May and then by 50 bps in each of the three successive meetings. In December 2022, RBI went in for 35 bps increase in policy rate and in February 2023 by 25 basis points. A basis point is one-hundredth of a percentage point.

GDP forecast

S&P Global Ratings has in its latest quarterly update for Asia-Pacific region kept the India GDP growth forecast for 2023-24 unchanged at 6 per cent. Similarly, for the next two fiscals the global rating agency pegged the GDP growth projections at 6.9 per cent, the same level as projected earlier.

This global rating agency had earlier projected that India’s GDP growth will hover around 7 per cent this fiscal. 

According to S&P, India’s GDP will increase to 6.9 per cent in 2024-25 and 2025-26 and then to 7.1 per cent in 2026-27, the same level as projected earlier.

S&P Global Ratings said that pronounced core inflation in India and Philippines suggests little slack in these economies. 

“Indeed, we consider these gaps basically long-term output losses; the gaps don’t close in our medium term prospects. This setback notwithstanding, these and other Asian emerging market economies remain among the fastest growing ones in our global growth output through 2026.  India leads, with average growth of 7 per cent in 2024-26”, the global rating agency said. 

Domestic demand

Traditionally, domestic demand has led the Indian economy. However, it has recently become more sensitive to the global cycle, partly due to increasing commodity exports. Its year-on-year GDP growth slowed to 4.4 per cent in the fourth quarter (October-December 2022), added the rating agency.

Meanwhile, S&P Global Ratings maintained “cautiously optimistic outlook for Asia-Pacific,” noting that China’s economy was on track to recover this year. 

“We believe the recovery in China will be largely organic, led by consumption and services. Our GDP growth forecast of 5.5 per cent this year, up from 4.8 per cent in November, exceeds the target of around 5 per cent announced at the National People’s Congress meetings in March,” said S&P Global Ratings Chief Economist Louis Kuijs. 

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