RBI steps creating more robust financial system, says rating agency.
S&P Global on Tuesday raised its forecast for India’s real economic growth in the next financial year (2024-25) by 0.4 percentage point to 6.8%, but still kept it much below the 7.6% GDP expansion rate estimated by India’s official statistics agency for the current year. In the “Economic Outlook Asia-Pacific report,” S&P said it expects higher interest rates, clampdown on unsecured lending and lower fiscal deficit to hurt the growth prospects next fiscal.
The rating agency also said in a separate report that recent measures by the Reserve Bank of India (RBI) will curtail lenders’ over-exuberance, enhance compliance culture, and safeguard customers, but added that the drawback will be higher capital costs for institutions.
“Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” S & P Global credit analyst Geeta Chugh said.
In recent months RBI has barred Paytm Payment Banks from accepting new deposits, restrained IIFL Finance from sanctioning gold loans and Jm Financial Products Ltd from doing any form of financing against shares and debentures.
Commenting on the growth scenario, S&P said: “Restrictive interest rates are likely to weigh on demand next fiscal year while regulatory actions to tame unsecured lending will affect credit growth. A lower fiscal deficit will also dampen growth.” The Reserve Bank of India (RBI) expects growth in FY25 to be at 7%.
Strong domestic demand and pick-up in exports are expected to be the growth drivers for 2024-25.
According to S&P forecasts, as the inflation measured by Consumer Price Index would decline further in the next financial year, the RBI is expected to cut policy rates by 75 basis points next FY.
“Slowing inflation, a smaller fiscal deficit and lower U.S. policy rates will lay the ground for the RBI to start cutting rates. But we believe more clarity on the path of disinflation could push this decision at least to June 2024, if not later,” the report said.
The CPI inflation is expected to be 4.5% in 2024-25, down from 5.5% in this financial year.
“There are always upward risks around inflation. But, barring major global shocks, we generally think those risks are now moderate. The upward price pressure from recent international shipping problems appears insufficient to meaningfully affect overall inflation.”
For the Asia-Pacific region the S&P has forecast a pick-up in small, open developed markets this year but slower growth in some developed markets.
“Even as we expect a mild slowdown in Asian EM economies, we generally see solid domestic demand growth and a pick-up in exports to drive robust growth, with India, Indonesia, the Philippines and Vietnam in the lead,” the report authored by Asia-Pacific Chief Economist at S&P Louis Kuijs said.
Source:financialexpress.com