Fitch slashes FY22 India growth forecast to 10%

“Fitch believes that rapid vaccination could support a sustainable revival in business and consumer confidence; however, without it, economic recovery would remain vulnerable to further waves and lockdowns,” it said.

Global rating agency Fitch on Wednesday slashed its India GDP growth forecast for the current fiscal to 10% from 12.8% expected earlier, stating that renewed restrictions in the wake of the second Covid wave have slowed recovery efforts.

“Fitch believes that rapid vaccination could support a sustainable revival in business and consumer confidence; however, without it, economic recovery would remain vulnerable to further waves and lockdowns,” it said.

With this, Fitch joins a number of agencies to trim India growth forecast for FY22, thanks to the damage caused by the second wave. Recently S&P cut its India growth projection for FY22 to 9.5% from 11%. Similarly, Moody’s has slashed its forecast to 9.3% from 13.7%. Last month, the Reserve Bank of India trimmed its growth forecast for the country to 9.5% from 10.5% projected in April. Various agencies have pegged their FY22 growth estimates in the range of 8.5-10%.

Fitch said the low vaccination rate makes India vulnerable to further Covid waves. Only 4.7 % of the country’s population was fully vaccinated as of July 5.

Flagging issues with the banking system, the agency stressed that regulatory relief measures have postponed underlying asset-quality concerns of the lenders for now. But their medium-term performance will be dented without a meaningful economic recovery.

State-run banks are at greater risk, given their average common equity Tier-1 capital is around 600 basis points lower than that of private peers, Fitch said. Private banks’ average return on assets is four times higher than the state-run ones.

Moreover, private banks raised higher equity capital from the market in FY21, having raked in almost $6.8 billion from the capital markets, against $4.4 billion by PSBs.

The impaired loans ratio dropped to 7.5% in FY21 from 8.5% a year earlier. But this ratio was supported by declining fresh bad loans as well as high levels of writeoffs.

The agency said continued relief measures aimed at Covid-19 affected segments (such as micro, small and medium enterprises, retail and contact services) helped defer the recognition of problems with asset quality. But impaired loans could peak after FY23 “since stress is likely to manifest from this pool over a fairly protracted timeframe”, it added.