Fitch raises India growth forecast after strong second-quarter

Fitch Ratings has upgraded India's current fiscal year growth forecast to 6.9% from 6.5%, citing stronger-than-expected 7.8% GDP growth in the June quarter, primarily driven by robust services activity and resilient consumption. While domestic demand is projected to remain the key growth driver, Fitch highlighted potential headwinds from rising trade tensions with the U.S. and anticipates growth moderation in the latter half of the fiscal year and subsequent years. The agency also flagged a potential overstatement of real GDP due to weak wholesale and commodity prices, and expects the Reserve Bank of India to implement a 25 basis point rate cut later this year given low inflation.

Analysis

Fitch Ratings has upgraded its GDP growth forecast for India for the current fiscal year to 6.9% from 6.5%, underpinned by a robust 7.8% year-on-year expansion in the April-June quarter that surpassed expectations. This strong performance is primarily attributed to resilient domestic demand, fueled by vigorous services activity and consumption. Despite this near-term strength, Fitch introduces several points of caution, projecting a moderation of growth in the second half of the fiscal year and a slowdown to 6.3% and 6.2% in the following two years. Key headwinds identified include rising trade tensions with the U.S., highlighted by a recent 25% tariff on Indian imports, which could dampen business investment. Furthermore, the agency flagged a potential overstatement of real GDP growth due to weak wholesale and commodity prices. On the monetary policy front, with headline inflation falling to a multi-year low of 1.6% in July, Fitch anticipates the Reserve Bank of India will have scope to implement a 25 basis point interest rate cut later this year, followed by a period of stable rates through 2026.

Key Decisions for Investors

• The upgraded 6.9% growth forecast reinforces a constructive near-term outlook on Indian equities, but investors should be prepared for the projected growth moderation in the latter half of the fiscal year.
• Given the low inflation environment and Fitch's expectation of a 25 basis point rate cut, consider overweighting rate-sensitive sectors such as financials, real estate, and consumer discretionary.
• Monitor U.S.-India trade negotiations and wholesale price index trends, as an escalation in tariffs or a rebound in commodity prices represent the primary risks to the current growth and inflation outlook.