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

Economic growth may become a casualty of 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 per cent from 7.8 per cent seen previously. The financial year runs from April to March. The forecast cut comes in the midst of a power struggle between the Reserve Bank of India and the government, after the finance ministry pushed to have a greater say over the RBI's functioning.

"So far, the Reserve Bank of India has dismissed 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 retained its full-year growth forecast at 7.4 per cent on Wednesday and kept rates unchanged.

Gross domestic product growth for the next year is seen at 7 per cent, Fitch said in the report. The sharp revision comes after growth in the latest quarter unexpectedly weakened to 7.1 per cent 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 a significant drag on overall gross domestic product amid steadily accelerating imports, Fitch said about India -- the country it rates in the lowest investment grade.

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"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.