'Monetary tightening may slow GDP growth'

The recent bout of monetary tightening by the Reserve Bank of India is likely to slow down economic growth to 8 per cent in 2007-08.

Stating this, investment firm JPMorgan Chase Bank added that a prolonged decline in Indian equity and property prices could sting local confidence and scale back spending.

However, the JPMorgan report also contends that India's current growth upturn has more solid foundations than the initial post-reform spurt of the early-90s.

India's average GDP grew at an average of 9.1 per cent per year in the last two fiscals. The estimate for the current fiscal (2006-07) is pegged at 9 per cent.

However, the investment bank has said that monetary tightening would not harm industrial production, unlike in the mid-90s, when industrial upsurge saw a sharp decline after monetary squeezing.

The report forecasts that monetary tightening in the current cycle will cause loan growth to moderate this year.

"However, the expected slowing of WPI inflation will pave the way for the RBI to ease liquidity conditions, and even to consider cutting banks' statutory liquidity ratio, later in the year; this in turn could limit the deceleration in lending," it said.

The report cautioned that any increase in global risk aversion would hurt the local equity market in India. "Admittedly, in recent years, easy global liquidity conditions, amplified by carry trades, have boosted capital inflows into India, which were already on the rise owing to burgeoning business opportunities. An increase in global risk aversion would undoubtedly hurt inflows into emerging markets, including India, which in turn could take a toll on the local equity market," it observed.