Goldman Sachs today raised the inflation forecast for the current year from 10 per cent to 11.5 per cent.
It, however, left the growth forecast for the current financial year unchanged at 7.8 per cent saying, it expected economic activity to moderate -- rather than slow sharply -- as large fiscal stimulus would hold up demand.
A Goldman Sachs report, which identified oil prices, monsoon and politics as the key risks, said the rural employment guarantee programme, the farm debt relief scheme and the implementation of the recommendations of the sixth pay commission would ensure that demand stayed strong during 2008-09.
“We expect monetary policy to remain tight in 2008, but start easing in 2009. We continue to expect the Reserve Bank of India to increase both the repo rate and the cash reserve ratio by 50 basis points each by end-October and then pause for the rest of FY09,” the report said on the eve of the first quarter review of the monetary policy.
It reduced India’s GDP growth forecast for 2009-10 to 7.2 per cent from 8.2 per cent due to a weaker investment outlook caused by higher interest rates. During 2009-10, it forecast inflation at 5.3 per cent, compared with its earlier estimate of 4.7 per cent.
“Indeed, normally scheduled election years tend to see a surge in demand. Private consumption demand, albeit moderating, remains robust as it is not very rate sensitive. The current official forecasts of a normal monsoon will continue to bolster the large demand for basic necessities from rural and middle-class India, which are less cyclically sensitive than discretionary spend.
We also expect investment demand to moderate rather than slow sharply as financing plans have already been tied up to a large extent. Thus, we expect growth to moderate (in 2008-09) rather than slow sharply,” Goldman Sachs Vice-President Asia Economic Research Tushar Poddar said.