Fitch Ratings on Thursday cut India growth forecast for 2018-19 to 7.2 percent from 7.8 percent, citing worries surrounding the banking sector, higher financing costs and reduced credit availability.
For 2019-20, it estimated the country to grow at 7.1 percent from 7.3 percent while fiscal 2020 growth is pegged at 7 percent versus earlier expectation of 7.3 percent.
India’s GDP growth softened quite substantially in the third quarter of the current fiscal year, growing by 7.1 percent year-on-year after 8.2 percent in the previous quarter.
Fitch said consumption was the weak spot, stepping down to 7 percent from 8.6 percent.
"We have lowered our growth forecasts on weaker-than-expected momentum in the data, higher financing costs and reduced credit availability," Fitch said in its Global Economic Outlook.The rating agency said that the country's banking sector is still struggling with a high proportion of non-performing assets, while non-banking financial companies are facing tighter access to liquidity following the default of IL&FS.
The government has taken control of Infrastructure Leasing and Financial Services (IL&FS), in a rare move that it said was needed to protect the country’s financial system and markets from potential collapse.
The government has also asked the Reserve Bank of India for a dedicated liquidity window to ease liquidity stress but the central bank hasn't announced any measures yet.
"So far, the RBI has dismissed calls by the government to provide emergency liquidity and to ease lending restrictions on the maximum volume of lending that state-run banks can provide to NBFIs (non-banking financial institutions)," the report said.
Fitch expects the rupee to weaken to 75 against the dollar by end-2019, hurt by the widening of the current account deficit amidst tighter global financing conditions. The rupee was trading at 70.88 a dollar on Thursday, down 41 paise from its previous close of 70.47.
Indian rupee has gained some ground in the last few weeks, helped in part by easing crude oil prices and weak US dollar. But the currency is expected to weaken over the six next months as uncertainty builds heading into national elections due in May.
"Fiscal policy should continue to support growth in the run-up to elections
in early 2019," said Fitch in the report.
Also there is a concern that the government will miss the fiscal deficit target due to a shortfall in revenues and lower-than-targeted disinvestment proceeds, India Ratings and Research said in a note.
"The widening of the current account deficit amidst tighter global financing conditions should put downward pressure on the currency," said Fitch.
Last month, Moody's Investors Service pointed out that India is among the list of countries facing the most severe currency depreciation with the rupee nearly losing 15 percent till date.
First Published: IST