Icra trims GDP forecast to 4.9% on tighter interest rates

Report by rating agency says hardening interest rates will have a negative impact on the already tepid economy

Rating agency Icra today slashed India's GDP growth estimate by 0.20% to 4.7-4.9% in FY'14, citing hardening interest rates which will have a negative impact on the already tepid economy.

 

"Given our expectation that interest rates would remain firm following a possible 0.50% increase in the repo rate in H2, we have revised down our GDP forecast for this fiscal to 4.7-4.9% from 4.9-5.1," Icra Managing Director and Chief Executive Naresh Takkar said.

 

RBI is likely to hike the key lending rate by 0.25% on inflation concerns and reduce the marginal standing facility rate by a similar measure at the second quarter review of the monetary policy next week, he said.

 

Wholesale inflation number rose to a seven-month high of 6.46% in September.

 

Icra has joined a slew of its peers, analysts and other experts who expect the GDP growth in the Asia's third largest economy to fall below 5% mark this fiscal.

 

Last fiscal GDP grew slowest in a decade to 5% on back of a string of reasons like a perceived policy paralysis, slowdown in exports and rupee depreciation.

 

The government has been exuding confidence that the economy will grow 5-5.5% this fiscal, while the RBI estimates the growth to come at 5.5%.

 

While the rupee depreciation, slowdown in investments and firmness in the crude prices remain a concern, some experts said good rainfall this year will help boost growth.

 

New Reserve Bank Governor Raghuram Rajan took everyone by surprise in his first policy review last month by raising the repo rate by 0.25% on pressures emanating on the inflation front.

 

He, however, reduced the marginal standing facility rate, at which RBI lends to banks if they jump their overnight borrowing limits, by 0.50% at the policy announcement and followed it up with a similar move the week afterwards.

 

Icra said the RBI will first close the swap window for oil marketeers and for banks mobilising foreign deposits, and watch the volatility in the market before scrapping the cap on overnight borrowings.

 

The rating agency, however, said the liquidity in the system is bound to be tight due to the seasonal pick up in the credit demand in the busy season.