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Fitch Solutions on Thursday has cautioned that policymaking could become slightly more challenging in the months ahead in India due to higher inflationary pressures, stronger growth, and still-wide fiscal deficits.
Inflation, growth and fiscal deficit make life slightly more difficult for policymakers, resulting in possible policy trade-offs, Fitch Solutions Country Risk and Industry Research said in its outlook for India.
Given still-strong growth and rising inflationary pressures, the market is pricing in 30-40 basis point hikes by December, which poses upside risks to Fitch Solutions forecast of four per cent in repo rate by end-2021, it said.
The unit of Fitch group said the headline inflation rate came in at 4.4 per cent y-o-y in September, which was lower than in the previous month (5.3%), but fuel prices continue to head higher, rising by 13.6 per cent , up from 13 per cent in August, and 12.6 per cent three months ago.
It said the Centre's move to cut excise duty on petrol and diesel should help ease price pressures somewhat, Brent crude oil prices would average $72 a barrel in 2022, which will add additional pressure to the government’s fiscal accounts, which will post a deficit of 9.1 per cent of GDP.
Year-to-date inflation averaged 5.2 per cent which is slightly below Fitch Solution's full-year forecast of 5.5 per cent for 2021.
"The good news is that inflation remains within the Reserve Bank of India’s target and the government reappointed the central bank Governor Shaktikanta Das for another three-year term, which will ensure policy continuity," it said.
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