Indian economy is expected to grow by 7.5% in the next fiscal, according to the global rating agency Fitch. This is because the current economic cycle in its view seems to have bottomed out and demand appears to have stabilized. Industrial production too has improved and an upward trend is on the horizon. Further inflation is not expected to re-emerge as a softening stance has been seen in the core inflation trends. Given this a rate cut by the RBI has become eminent.
As per the rating agency, GDP grew at 6.1% in Q3 of FY’12 as compared to the 6.9% in the same quarter last year. However going forward, the numbers are expected to improve. A breakdown by expenditure shows that private consumption has rebounded, stabilizing demand. Industrial production too has unexpectedly increased to 6.8% y-o-y in January compared with a 2.5% y-o-y rise in December. Manufacturing PMI remains elevated, reaching 56.6 in February, slightly below 57.5 in January. Equally vital, fixed investment fell 1.2% y-o-y in Q4FY11, following a 4.0% y-o-y decline in Q3FY11.
Since economic activity is still subdued due to the global economic scenario, inflationary pressures are not expected to rise unless there is an unexpected spike in oil prices. February`s rise in headline WPI was largely due to unseasonal rain patterns, which led to a surge in food prices. However core inflation pressures are easing. Given the tamed levels of inflation, the RBI should also be able to cut its key reverse repurchase rate, which currently stands at 7.25%, and bring it down by 1% over the course of 2012-13. The cash reserve ratio was cut by 0.75% to 4.75% in early March, which follows the 0.5% cut in late January.
Finance Minister had projected India’s GDP growth at 7.6% (+/- 0.25%) for FY’13 in his Union Budget on the back of strong domestic fundamentals and a still fragile global economy. The observations made by Fitch only reaffirm his stance. On the global front, Fitch Ratings forecasts that the economic growth of major advanced economies (MAE) will be modest at 1.1% in 2012, followed by gradual acceleration to 1.8% in 2013. Europe shall continue to remain weak but US is expected to gain momentum. Growth in the BRICS countries will remain strong barring China which is expected to slow further this year.
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