New Delhi, December 20: Fitch Ratings on Friday has cut India’s GDP growth forecast for 2019-20 to 4.6 per cent from 6.8 per cent in 2018-19.

“Our outlook on India's GDP growth is still solid against that of peers, even though growth has decelerated significantly over the past few quarters, due mainly to domestic factors, in particular a squeeze in credit availability from non-banking financial companies (NBFC) and deterioration in business and consumer confidence,” Fitch stated.

It expects growth to gradually recover to 5.6 per cent in FY21 and 6.5 per cent in FY22 with support from easing monetary and fiscal policy and structural measures that may also support growth over the medium term.

Fitch Ratings has affirmed India's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a stable outlook.

“The affirmation of the ratings incorporates our expectation of moderate fiscal slippage relative to the central government's deficit target of 3.3 per cent of GDP in FY20. The government is again facing a trade-off between stimulating the economy and reducing the deficit in the medium term. Some fiscal slippage has occurred in recent years against government targets, even during periods of sustained stronger growth,” the credit rating agency said.

The FY20 deficit target had already been exceeded by end-October due to a weak revenue intake, and a deceleration of nominal quarterly growth suggests further revenue pressure for the rest of the financial year.

Fitch expects the Reserve Bank of India to cut its policy rate by another 65 basis points in 2020, after a cumulative 135 basis points easing since February 2019. The uptick in inflation to 5.5 per cent year-on-year in November appears to reflect a temporary spike in food inflation, while pressure on core inflation, which remained stable at 3.5 per cent, seems limited in the current environment.

Indian banks generally have thin buffers to deal with continued systemic stress in the NBFC sector, to which their exposure reached 7.4 per cent in FY19.

“We estimate that banks are already $7 billion short of the capital required to meet a 10 per cent weighted-average common equity Tier 1 ratio by FY21 -- the level that we believe would give the banks an adequate buffer above regulatory minimums. The banking sector's non-performing loan ratio fell to 9.3 per cent in FY19, from 11.6 per cent in FY18, but non-performing loans could build up again in the current weak economic environment,” Fitch added.