India Ratings pegs down FY19 GDP forecast to 7.2 per cent on inflation

The ratings agency has also revised upwards its inflation forecast despite a likely normal rainfall this year.

"The key reasons for the downward revision (GDP forecast) is the headwinds emanating from the elevated global crude prices and government decision to fix the minimum support prices (MSPs) of all kharif crops at 1.5 times of the production cost," the agency said in a note.

The other headwinds are rising trade protectionism, a falling rupee and no visible signs of the abatement of the non-performing assets of banks, it added.

The agency has also revised upwards its inflation forecast saying "despite a likely normal rainfall in 2018, we now expect average retail and wholesale inflation in FY19 to come in at 4.6 per cent and 4.1 per cent, respectively as against 4.3 per cent and 3.4 per cent forecast earlier."

The inflation forecast is due to the pass-through of global crude prices, the massive hike in MSPs of kharif crops and the hike in house rent allowances by the states.

At a disaggregated level, the agency expects private final consumption expenditure to grow 7.6 per cent in FY19, compared with 6.6 per cent in FY18.

Growth is coming from the waning impact of note-ban, a rise in rural consumption due to two consecutive favourable monsoons and reduction in the GST rates on several items, the agency said.

"However, investment expenditure as measured by gross fixed capital formation is unlikely to improve significantly in FY19 which is expected to clip at 8 per cent this year," it added.

The agency believes government capex alone will not be sufficient to revive capex cycle, as its share in the total capex was only 11.1 per cent during fiscals 2012 and 2017.

Although it expects annual value of exports to touch USD 345 billion in FY19, crossing the peak of USD 318 billion attained in FY14, it will continue to face headwinds due to the ongoing global developments which are threatening to turn into a trade/currency wars between the US and China.

In response to the rising inflation, the Reserve Bank so far this fiscal has raised the repo rate by a cumulative 50 bps. It now expects CPI inflation for the second half to be 4.8 per cent, 10 bps higher than its earlier projection.

The agency does not expect any more hikes in FY19, though, and therefore expects the benchmark 10-year G-sec to be in the range of 7.8-7.9 per cent by Macy 2019.

It expects the Centre to meet its fiscal deficit target at 3.3 per cent of GDP in FY19. The current account deficit, according to the agency, is likely to touch USD 71.1 billion or 2.6 per cent of GDP) from USD 48.7 billion or 1.9 per cent in FY18 due to the widening trade gap.

Volatile crude prices, waning portfolio inflows, normalisation of the monetary policy in the advanced economies and a likely USD 25 billion mobilisation from NRIs will guide the rupee level, according to the agency, which sees it averaging at Rs 68.40 to the US dollar through the reminder of the current fiscal year.