New Delhi: Fitch Ratings Monday projected Indian economy to grow at a slower pace of 7.4 percent in the current fiscal and touch 8 percent growth only in 2018-19, as it expects the benefits of reforms and impact of monetary easing to kick in with a lag.
The US-based rating agency projected Reserve Bank of India (RBI) lowering interest rates by 0.25 percent before end of 2016, followed by another rate cut in 2017.
Fitch Ratings' latest bi-monthly Global Economic Outlook (GEO) report said "We forecast GDP growth to accelerate gradually from 7.4 percent in FY17 (year ending March 2017) to 8.0 percent in FY19".
It projected the growth to be at 7.9 percent in 2017-18.
The Indian economy grew 7.6 percent last year.
"Public-sector wage hikes, lagged impact of monetary policy easing, and a better monsoon season than the previous two years, should support growth in the near-term, while decent progress on structural reforms including the recent landmark passage of the Goods and Services Tax in parliament should facilitate a turnaround in investment over the medium term," Fitch said.
It said its forecasts imply that India will remain by a wide margin the fastest growing country among Fitch20 economies.
GDP growth fell to 7.1 percent in Q2 from 7.9 percent Q1. This was lower than the 7.6 percent estimated in the July Global Economic Outlook (GEO) report.
"Persistent investment weakness and soft industrial production suggest the shortfall was not entirely due to short-term volatility in the data," Fitch said.
It forecasted GDP growth to accelerate gradually from 7.4 percent in FY17 (year ending March 2017) to 8.0 percent in FY19.
Private consumption growth was 6.7 percent in Q2 and is expected to reach 8.8 percent in FY18 due to increasing real disposable income growth.
In contrast, gross fixed capital formation remained very weak in Q2 of FY16, declining by 3.1 percent year-on-year.
"Nevertheless, we forecast a sharp pick-up in FY18 investment growth to 6.3 percent. Strong export growth also continued in Q216, a rebound from the contraction in 2015.
"Meanwhile, import dynamics remained weak and thus net exports will have a 1.6 percentage point growth contribution in FY17 before moderating over the medium-term," Fitch said.
It said that RBI, led by its new Governor Urjit Patel, is expected to cut its policy rate by 25 basis points to 6.25 percent before the end of 2016, followed by one more rate cut in 2017.
Headline consumer inflation was 5.1 percent in August 2016, a 1 percentage point drop compared to the previous month.
"We forecast inflation to start gradually increasing to 5.5 percent by end-2016, 5.8 percent by end-2017 and 6.0 percent by end-2018, the upper end of the 4 percent plus or minus 2 percent medium-term inflation target range," it added.