"We expect (India's) robust growth relative to peers to support credit metrics in line with the current rating," the rating agency said.
Fitch forecasts India's GDP growth to remain robust at 7.8% in FY23. However, it is a downward revision from its 8.5% forecast in March due global commodity price shocks, that according to the agency, is dampening some of the positive growth momentum.
The Reserve Bank of India earlier this week retained its GDP growth forecast at 7.2 for the current fiscal but cautioned against negative spillovers of geopolitical tensions and a slowdown in the global economy.
“India's strong medium-term growth outlook relative to peers is a key supporting factor for the rating and will sustain a gradual improvement in credit metrics. We forecast growth of around 7% between FY24 and FY27, underpinned by the government's infrastructure push, reform agenda and easing pressures in the financial sector. Nevertheless, there are challenges to this forecast, given the uneven nature of the economic recovery and implementation risks for infrastructure spending and reforms," Fitch said.
The rating agency conditions in India's financial sector, which were were a key growth impediment before the pandemic, but have improved in recent years, which should facilitate better credit allocation and investment in the medium term.
“Banks' capital sufficiency will be important in determining their ability to provide more credit, even as regulatory forbearance has given them time to rebuild capital buffers. Potential asset-quality deterioration from the pandemic shock appear manageable, but there are risks as forbearance measures unwind amid heightened global macroeconomic uncertainty," Fitch said.
On price pressures, Fitch said it expects inflation to remain elevated in FY23 at 6.9%, due to the sharp rise in global commodity prices and underlying demand pressures. The Reserve Bank of India (RBI) lifted its policy repo rate by 90bp to 4.90% in just over a month, signalling its growing concerns that inflation could exceed its 2%-6% target band for a sustained period.
“We forecast the RBI to continue to withdraw liquidity and raise rates, with the repo rate reaching 6.15% by FY24," Fitch added.
