The Asian Development Bank (ADB) today lowered India’s gross domestic product (GDP) growth forecast for 2008-09 to 7.4 per cent from its earlier projection of 8 per cent. It also lowered the forecast for 2009-10 to 7 per cent (from 8.5 per cent earlier) and said that further increases in short-term policy rates, or the cash-reserve ratio, could threaten growth.
Separately, Macquarie Securities economist Rajeev Malik said the growth would slow. “Our forecast is 7.5 per cent for this year, falling to 7.2 per cent next year,” he said. In spite of the downgrading of the growth prospects, analysts are divided over the course the central bank will take. The consensus view seems to be that the Reserve Bank of India (RBI), under the new governor, Duvvuri Subbarao, will ease monetary policy only by early next year.
Despite the high growth in money supply, Malik said the mayhem in global markets and the recent fall of the inflation rate increased the risk that the RBI would hold the key rates in its October review and then cut early next year, by when the inflation picture should improve convincingly.
“That is when the RBI will get into an easing mode. We expect 200 basis point cuts in the repo and CRR next year,” he added.
Sherman Chan, economist, Moody’s Economy.com, does not expect any monetary loosening for the remainder of 2008, mainly because inflation is well above the Indian central bank’s comfort level. “I forecast another round of tightening in October in order to further cool inflation and support the rupee,” she said.
Malik added that further weakness was in store for the rupee, which may fall to 47 before this December given the global cues. “I expect the RBI to intervene to check the rupee slide, running down forex reserves,” he said.
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In an update of its Asian Development Outlook for 2008, the Manila-based multilateral development bank said the RBI faces a serious dilemma in its monetary policy management as further increases in short-term policy rates or the cash reserve ratio could threaten growth.
On the other, inflation (the wholesale price index-based annual rate stood at 12.1 per cent for the week ended August 30) is still way beyond its stated 7 per cent policy objective to be achieved by March 2009. “A further tightening in policy, raising both nominal and real interest rates, will probably be required,” it added.
The Indian economy grew an impressive 9 per cent in 2007-08, witnessing robust growth for the fifth successive year. In the first quarter of the current fiscal, GDP growth moderated to 7.9 per cent from 9.2 per cent in the corresponding quarter last year, the slowest expansion in three-and-a-half years.
Dun & Bradstreet India’s Kaushal Sampat said the moderation in first quarter growth is significant. “Additionally, the moderation in growth rate of gross fixed capital formation to 8.96 per cent in the first quarter is indicative of a slowdown in investment activity,” he said.
At end-August, prime lending rates were quoted at 12.75-13.25 per cent, while lending for non-prime borrowers was in the range of 15-17 per cent. However, credit expansion continues, with high demand for working capital by state-owned oil companies and bank loans to fill in for diminished foreign funding are suggested as the main reasons.
Bank credit to the commercial sector has been rising this financial year, with year-on-year growth climbing to 26.8 per cent by July end, from 22.3 per cent March-end, the report points out.
ADB chief economist Ifzal Ali also said the regional economic outlook remains tied to the fortunes of industrial countries. “Uncoupling is a myth. If the global slowdown extends beyond 2009, the repercussions for the region could be severe,” he said.