As the stern anti-inflationary stance of Reserve Bank of India crimps growth and demand, global ratings agency Fitch has further lowered its growth forecast for the domestic economy in 2011 to 7.7% from 8.3% previously.
"The growth has clearly hit a soft patch, as GDP grew only 7.8% in the first quarter of 2011 [Q4 of FY11], down from 8.4% in Q4, FY10, and 8.9% in Q3, FY10," said Fitch Ratings in its global economic outlook report.
"A breakdown of GDP by expenditure shows that the slowdown can be largely attributed to a downturn in fixed investments, which grew by only 0.4% in Q1 of 2011. Private sector investment activity not only appears to be affected by higher borrowing costs, but has also been affected by other factors like rising input costs, thin profits and rising bureaucratic red tape," the report notes.
Fitch joins other major agencies like the IMF and World Bank that have projected sub-8% growth for the domestic economy this fiscal, in a major drop from 8.5% last year.
The Fitch report says the economic outlook is likely to remain somewhat clouded by persistently high inflation.
Wholesale price index-based inflation has remained high since early 2010, noted the Fitch report, and said, "Core inflation grew by average of 9.3% in the first five months of 2011, slightly below 9.6% averaged in 2010.
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"Although food inflation has eased from the high 20.9% in the first half of 2010, underlying inflation pressures remain intense. The economic outlook is likely to remain somewhat clouded by persistent inflationary pressures as the headline measure of WPI inflation has remained high since early 2010," the report said.
After a month-long rally, food inflation plunged to a one-and-a-half month low of 7.78% for the week ended June 18, down from 9.13% in the previous week.
Fitch has also opined that the RBI may need to raise policy rates further.