RBI-Government Feud In Fitch Report As India Growth Forecast Slashed

Economic growth may become affected by the tug-of-war between the government and the central bank. Fitch Ratings lowered its 2018 growth forecast for Asia’s third-largest economy to 7.2 percent from 7.8 percent seen previously. The financial year runs from April to March. The forecast cut comes in the midst of a power struggle among the Reserve Bank of India and the government after the finance ministry pushed to have a wider say over the RBI’s functioning.

“So far, the Reserve Bank of India has discodet calls by the government to provide emergency liquidity and to ease lending restrictions,” the rating company said in its latest Global Economic Outlook. Higher financing costs and reduced credit availability contributed to the lowering of the forecast, it said.

The central bank had its full-year growth forecast at 7.4 percent on Wednesday and kept rates unchanged.

Gross domestic product growth for the next year is looked at 7 percent, Fitch said in the report. The hard revision comes after growth in the latest quarter unexpectedly weakened to 7.1 percent following back-to-back interest rate hikes, a funding squeeze and subdued expansion in the farm sector.

India is among the 11 countries that saw a cut in their growth projections due to tighter financing conditions. The external sector was also an important drag on overall gross domestic product amid steadily accelerating imports, Fitch said about India — the country it rates in the lowest investment grade.

“Interest rates in India, Mexico, Indonesia and, most dramatically, Turkey are all much higher than we anticipated this time last year, and central banks in Indonesia, Mexico, and South Africa have all surprised on the hawkish side since September,” the report said.

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