S&P Global Ratings has retained its forecast for India's gross domestic product (GDP) growth at 6% for the financial year 2023-24.
The ratings agency expects India's GDP to grow at 7% in the fiscal year ending March 31, 2023 and 6.9% in FY25 and FY26.
S&P predicts inflation to come down 5% in FY24 from 6.8% in the ongoing financial year.
"Pronounced core inflation in India and the Philippines suggests little slack in these economies. Indeed, we consider these gaps basically long-term output losses; the gaps don't close in our medium-term projections," the ratings agency says.
"This setback notwithstanding, these and other Asian emerging market economies remain among the fastest growing ones in our global growth outlook through 2026. India leads, with average growth of 7% in 2024-2026," it adds.
S&P Global Ratings expects the Reserve Bank of India (RBI) to raise its already high policy rate further following a recent upside surprise to inflation. "In our view, India's Consumer Price Index (CPI) inflation should moderate to 5% in fiscal year 2024 (ending March 2024) but we also anticipate upside risks, including from weather-related factors," the ratings agency says.
Earlier this month Fortune India reported that elevated temperatures across India could not only affect the country's agricultural output but also keep inflation at elevated levels. The March to May period is going to be hotter than usual, with enhanced probability of occurrence of heatwave over many regions of central and adjoining northwest India, the India Meteorological Department (IMD) said in February.
In India, domestic demand has traditionally led the economy but it has become more sensitive to the global cycle lately in part due to rising commodity exports, says S&P.
The country's foreign exchange reserves fell in the first half of last year. While this stemmed largely from valuation changes, in India central bank intervention added to the reduction in foreign exchange reserves, says S&P.
The current account balances of other energy-importing economies in the Asia-Pacific have deteriorated. "In India and Thailand, the external deficit reached about 3%-3.5% of GDP in 2022; in the Philippines about 5%; and in New Zealand 7.5%. South Korea's surplus shrank to 1.8% of GDP," the ratings agency says.
"We maintain our cautiously optimistic outlook for Asia-Pacific. China's economy is on track to recover this year. For other economies this will dampen but not offset the hit of slower growth in the U.S. and Europe, the fading impact of domestic reopening post the pandemic, and higher interest rates," says S&P.
"In most economies, inflation should decline, although elevated core inflation will prod some central banks to raise rates further. External pressure from rising U.S. interest rates will likely push some others to lift rates further too," it says.
S&P expects U.S. policy rates to increase by another 25 basis points (bps) to a peak of 5%-5.25% at the end of 2023 and to start to edge down only in early 2024. "Taking into account the risk of larger U.S. rate increases, we expect the depreciation pressure on Asia-Pacific currencies to remain for much of 2023," it says.