New Delhi [India], August 11 (ANI): India's economic growth is expected to remain resilient despite near-term headwinds from the energy shock, with public capital expenditure, a recovery in private investment and favourable demographics supporting medium-term expansion, Fitch Ratings said as it affirmed India's sovereign rating at 'BBB-' with a Stable Outlook.

Fitch forecast India's GDP growth at 6.4 per cent in FY27, below the 7.4 per cent average recorded over the past three years but still around three times the 2 per cent median growth rate for the 'BBB' rating category. The ratings agency said it expects India's resilience to external shocks to continue, although uncertainty surrounding the US-Iran conflict poses residual risks given the country's position as a large net energy importer.

The rating agency expects inflation to remain within the Reserve Bank of India's 2-6 per cent tolerance band, although headline inflation is likely to rise due to the energy shock. Inflation is forecast to average 4.1 per cent in FY27, compared with 2.1 per cent in FY26, while core inflation is expected to remain around 4 per cent.

Fitch expects the RBI to raise its policy rate by 25 basis points to 5.5 per cent later this year, citing risks of second-round effects from higher energy prices and El Nino conditions.

India's medium-term growth outlook remains robust. Public capex, a pick-up in private investment and favourable demographics are expected to remain key growth drivers. The agency also expects deregulation, recent GST and labour code reforms, and greater trade openness to provide a modest boost to economic activity.

India's financial sector continues to strengthen, supported by improving bank asset quality, healthier financial metrics and enhancements to the regulatory framework.

On fiscal consolidation, Fitch expects the general government deficit to narrow to 7.3 per cent of GDP in FY27, from 7.5 per cent in FY26. It expects the central government to meet its 4.3 per cent fiscal deficit target, although a modest slippage remains a risk amid higher fertiliser subsidies and excise duty cuts.

General government debt, however, remains a key constraint on the sovereign rating. Fitch estimates debt at 84.4 per cent of GDP in FY26, well above the 57 per cent 'BBB' median, but expects it to gradually decline to around 79 per cent by FY31.

The agency said India's solid external finances, including a low current account deficit, net external creditor position and sizeable foreign exchange reserves, provide an important buffer. It expects FX reserves to reach USD 733 billion by end-FY27, equivalent to 7.4 months of external payments.

Fitch said India's robust growth prospects and improving policy credibility support the rating, while high fiscal deficits, debt and debt-service costs, along with weaker structural indicators, continue to constrain the sovereign's credit profile. (ANI)