Fitch cuts Indian FY17 GDP growth forecast to 6.9%

December 01, 2016 - United Kingdom

India’s GDP growth rate is likely to decrease to 6.9 per cent from the previously predicted rate of 7.4 per cent due to temporary disruptions caused by the demonetisation of currency notes of high denominations, according to Fitch Ratings. It also said that the economic activities of the country are likely to be hit in the third quarter due to cash crunch.

The US based leader in financial information services has also revised the GDP growth forecast for the next to fiscals, lowering it to 7.7 per cent from the previously predicted rate of 8 per cent. Gradually implementing structural reform agenda and higher disposable income could result in a higher growth, said media reports quoting the ‘Global Economic Outlook - November’ report by Fitch Ratings.

Consumers are facing a liquidity crunch and are unable to make purchases. Supply chains have also been disrupted and the time spent in queuing up in banks has also affected general productivity, stated the report. The impact on the growth of India’s GDP will increase if the disruptions continue. Fitch added that the medium-term effect on GDP is not certain, but it is unlikely to be very large.

As new incentives for people avoiding cash transactions have not been introduced, the informal sector could go back to business as usual and people in this sector are likely to continue using high denomination currency notes or gold to store their wealth.

Monetary transmissions may have been impaired, but Fitch expects RBI’s 1.5 per cent policy rate cuts from early 2015 to contribute towards a higher GDP growth.

According to the report, a rise in low-cost funding because of demonetisation may remove a constraint on banks, which prevented lending rates from keeping pace with the RBI’s policy rate cuts. However, this is likely to depend on deposits remaining in banks beyond the next few months. (KD)