Fitch cuts FY27 growth projection to 6.4%; US-Iran war to slow down economy

New Delhi: Fitch Ratings on Tuesday lowered its GDP growth projections for the current fiscal to 6.4 percent from the earlier estimate of 6.7 percent, saying that the US-Iran war will slow down the economy in the September and December quarters.

Fitch said it expects a slowdown in economic growth in FY27 from the 7.4 percent clocked in FY26 as rising prices erode real incomes and dampen consumer spending, amid a resilient capital expenditure.

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"We expect GDP growth to ease to 6.4 percent in FY27, a downward revision of 0.3pp from March. Domestic demand will be the main driver of growth, but lower imports in real terms imply positive contributions to growth from net external demand," Fitch Ratings said in its June Global Economic Outlook.

Last week, the RBI had cut its growth forecast for the current fiscal to 6.6 percent and upped its inflation projection to 5.1 percent.

The rating agency said the slowdown in the economy will be most apparent in the second and third quarter of FY27, as rising prices due to the US-Iran war erode real incomes and dampen consumer spending. Fuel prices have both risen by 4-5 percent in recent weeks.

For FY28, Fitch expects GDP growth to pick up as the energy shock unwinds, with stronger consumer spending and investment translating to a growth rate of 6.7 percent for the full financial year, and ease towards trend growth of 6.4 percent in FY29.

Fitch has also lowered its 2026 forecast for global growth by 0.2pp to 2.4 percent as world growth prospects have been hurt by the oil crisis prompted by the US-Iran war.

"The oil price shock is hitting world growth prospects and increasing downside risks. But we are also amid a very pronounced boom in global spending on IT and that is cushioning the impact on activity in the near term, particularly in Asia," said Fitch, Chief Economist, Brian Coulton said.

The closure of the Strait of Hormuz has now lasted 14 weeks and we assume it will not start to reopen until July.

Fitch has revised its 2026 average price assumption for Brent crude oil to USD 87 per barrel (bbl), up from the USD 70/bbl estimated in March.

The oil shock is a strong headwind to world growth, but its base case is far less severe than the pernicious oil shocks of the 1970s. Real oil prices reached USD170/bbl in 1979 (measured in current prices) and OPEC played a very different role then. Oil consumption as a share of world GDP has halved since 1980.

Fitch said India's consumer price inflation has not yet risen significantly, but price pressures are mounting; wholesale prices rose by 8.3 percent y/y in April and CPI inflation to 3.5 percent.

"We expect inflation to rise steadily over the months ahead, reaching 5.3 percent by the end of the (calendar) year. This reflects a combination of base effects and higher energy prices. Forecasts for below-average monsoon rains and the current heatwave in parts of India raise the risk of even stronger price rises," Fitch said.

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The Reserve Bank of India (RBI) kept its policy rate at 5.25 percent in April. But Fitch expects RBI to change course and increase rates once this year to 5.5 percent to address the rising price pressures from the adverse supply shock.

"We do not expect a further, significant depreciation in the Indian rupee over the rest of the year," Fitch said. The global rating agency expects the exchange rate to average 97.50 to a dollar in current fiscal.

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