Indian economy has more leeway for easing monetary policy: Fitch

In a new commentary, rating agency Fitch today said that India's monetary authorities have scope to ease policy to counter the downturn witnessed by today's Q4'12 GDP figures (See: Economic growth slows to 6.1 per cent in Q3) while fiscal policy is likely to remain restrained due to the government's fiscal consolidation goals. 

Fitch said the slowing growth was ''in line with our expectation of a cyclical downturn, partly driven by the authorities' moves to cool the economy."

The drop to a year-on-year GDP growth rate of 6.1 per cent, from 6.9 per cent in the second quarter, is not a dramatic surprise, it said.

"Coupled with the recent downturn in inflation, it suggests that the Indian economy has moved past the overheating stage. Domestic demand appears to have stabilised, with private consumption expenditure rising 6.2 per cent year-on-year in Q411, up from 2.9 per cent in Q311. This could be a signal that the economy is hitting a trough," it warns.

Inflation as measured by the wholesale price index hit its lowest level in more than two years in January, when the WPI rose 6.55 per cent from a year earlier, compared with 7.47 per cent in December. This gives the Reserve Bank of India, which increased its repurchase rate by 375 basis points from March 2010 to October last year, room to cut rates if it feels this is the appropriate response.

However, the economic downturn will reduce tax collection, making it harder for the central government to meet its FY 2011-12 deficit target of 4.6 per cent of GDP - Fitch's own deficit forecast is around 5.5 per cent-6.0 per cent. The prospect of a bigger-than-expected deficit might make it harder for the government to announce an expansionary budget in March.