New Delhi: S&P Global Ratings on Monday lowered its growth projections for the Indian economy for the next two fiscal years, citing the impact of potentially high interest rates and reduced fiscal stimulus on urban demand, as well as post-election “changes in the US macro picture”.
In its latest report, "Economic Outlook Asia-Pacific Q1 2025: US Trade Shift Blurs the Horizon," the rating agency projected India's GDP growth at 6.7% for FY26 and 6.8% for FY27, marking a downgrade from its earlier estimates of 6.9% and 7%, respectively.
"In India, we see GDP growth easing to 6.8% this fiscal year (FY25) as high interest rates and a lower fiscal impulse temper urban demand," the rating agency said in the report.
"While purchasing manager indices (PMIs) remain convincingly in the expansion zone, other high-frequency indicators indicate some transitory softening of growth momentum due to the hit to the construction sector in the September quarter," it added.
The updated forecasts come as part of a broader assessment of Asia-Pacific economies following the US elections, with S&P highlighting challenges such as tighter financial conditions and evolving trade dynamics that may weigh on regional growth.
"The impending change in the US administration will be challenging for China and the rest of Asia-Pacific. US tariff increases have become more likely, especially on China, and possible changes in the US macro picture are leading to different interest rate expectations," the report said.
"While much of the region should be able to continue to grow solidly, central banks will probably remain cautious by not reducing their policy rates too fast. And risks have gone up," it added.
To be sure, India's GDP growth already likely eased during Q2, FY25, driven by heavy rainfall, subdued exports, and weak corporate margins.
According to a report by rating agency ICRA, released last week, India’s GDP growth is likely to have slowed marginally to 6.5% in the second quarter of FY2025 from 6.7%.
The agency also forecast a decline in gross value added (GVA) growth—a measure of the value of goods and services produced in the economy—to 6.6% in Q2, compared to 6.8% in the previous quarter.
While government capital expenditure and healthy kharif sowing provided a lift, their impact was offset by disruptions caused by excessive rainfall, which affected mining, electricity demand, and retail activity during Q2FY25, the rating agency said.
India's economy grew 6.7% in the April-June quarter (Q1, FY25), marking the slowest pace in five quarters, according to data released by the statistics ministry in August. This followed a 7.8% expansion in the previous quarter.
This slackening of India's economic growth can be attributed to lower capital expenditure spending by the state and central government during the general elections, which took place between April and June 2024.
The Q2, FY25 GDP data will be released later this week.
S&P Global expects the Reserve Bank of India (RBI) to make only one rate cut this fiscal year, as consumer inflation, driven by food price surges caused by agricultural supply shocks linked to erratic rainfall and climate change-induced heatwaves remain a concern.
"These shocks are linked to changing rainfall patterns and climate change-driven heatwaves," the report added.
According to the latest statistics ministry data, retail inflation based on the consumer price index (CPI) hit 6.21% in October, recording a 14-month high.
The rise in inflation, driven by surging food prices, also breached the RBI’s medium-term target of 2-6% for the first time in over a year.
Food inflation, a persistent challenge, rose to 10.87% in October from 9.24% in September. This, too, was the highest in 15 months. To be sure, food inflation accounts for nearly half of the consumption basket.
During the last monetary policy meeting, in October, the RBI left the benchmark repo rate unchanged at 6.5%, signalling that interest rate cuts may take a while.
Pertinently, the repo rate has not changed in 11 meetings of the RBI’s MPC since February 2023.
"Traditionally volatile and hard to predict, food inflation has become even more capricious lately," the report said.
"The RBI cannot ignore food inflation when considering rate cuts. Food items make up nearly 46% of the inflation basket and persistently high food inflation raises inflationary expectations," it added.
