Fitch cuts India's growth forecast to 4.8% in FY14

Fitch said prospects of a swift economic turnaround have been further dented by a 20% fall in the domestic currency since the end of May

Fitch Ratings has cut its growth forecast for India in 2013-14 to 4.8 per cent, from its earlier estimate of 5.7 per cent and, cut its projection for the next financial year to 5.8 per cent fromthe earlier  6.5 per cent, "underlining the severity of the growth shock".

The agency said the scope of growth had been hit by a falling rupee. "The prospects for a swift turnaround in the economy have been further dented by the sharp 20 per cent depreciation in the exchange rate since the end of May, due to increased financial market concerns over India’s large current account deficit," said Fitch in its 'Global Economic Outlook' report on Thursday.

It said the weaker exchange rate had not only dampened consumer and business confidence but complicated matters for policy makers. "Pressure on the exchange rate has hindered India’s ability to provide either fiscal or monetary stimulus to support growth."

The agency said demand had been bleak and was a large drag on the economy. However, it mentioned the strong monsoon and how it could lead to continued improvement in agricultural output that can "provide an important boost to India’s economy".

The improvement of global growth prospects should support India's manufacturing sector, it said. This sector contracted 0.2 per cent in the first quarter of this financial year. However, it recovered slightly in July, when it grew three per cent, according to Index of Industrial Production data.

Fitch did not mention the sovereign rating outlook. In July, it had scaled up the outlook on this from negative to stable. Recently, however, it had warned of a downgrade if the country was unable to meet its fiscal deficit target. On the fiscal front, it said the government was likely to cut budget expenditure other than fuel subsidy, to meet its deficit target of 4.8 per cent of gross domestic product (GDP).

On inflation, the agency said it expected acceleration in both wholesale and retail inflation in the coming months. In August, these were 6.1 per cent and 9.5 per cent, respectively.

Last week, the Prime Minister's Economic Advisory Council had slashed the GDP growth forecast for this financial year to 5.3 per cent from its earlier estimate of 6.4 per cent. Various brokerages and agencies, such as CRISIL, CLSA and JP Morgan, had earlier cut their India growth forecast to below five per cent for 2013-14, due to fragile economic conditions.