JPMorgan revises GDP forecast down to 7%

Investment bank JPMorgan has cut the gross domestic product (GDP) growth forecast for India for 2008-09 to 7 per cent from 7.5 per cent previously, citing expected moderation in industrial and service sector growth.

"Overall, the moderation in growth to a six-year low of 7 per cent in 2008-09 will be temporary; growth is poised to pickup to 8 per cent in 2009-10, and the medium-term favourable structural dynamics remain in place," said Rajeev Malik, senior economist, JPMorgan.

This is the lowest growth forecast for 2008-09 so far. The International Monetary Fund and Crisil have projected 8.2 per cent and 8.5 per cent GDP growth respectively.

JPMorgan has envisaged a soft export growth causing worsening of the trade balance and GDP. It also expects real investment spending to moderate slightly from its current level.

However, the investment bank is confident that the Reserve Bank of India will announce a 25 basis points cut in repo rate in its July meeting. "Our revised India GDP forecast does not prompt us to change our interest rate call," Malik said.

The bank further attributed the cut in growth expectations for India to its downward revision of its US economic outlook. The bank expects US growth in first quarter of 2008 (January-March) to be "flat".

However, JPMorgan maintains that owing to its relatively less open nature, the Indian economy is much better insulated than other emerging Asian economies to the fallout from worsening global economy.

"Admittedly, some sectors, such as IT services, are more heavily dependent on the US, and will most likely suffer more. However, there is a sizable presence of foreign investors in the local equity market, and changes in global risk appetite impact equity prices, but the magnitude is greater than the impact on the economy," Malik said.

JPMorgan estimates the rupee-dollar exchange rate to remain within the 40-41 range in the very near term, with a possibility of above 41 if foreign equity outflows persist.