Gross domestic product growth is now expected to moderate to 7.5-7.8 per cent in 2008-09, lower than the previous forecasts of 8-8.5 per cent, they said, predicting a compression in investment and demand growth in the short- to medium-term.
"The economy is headed for a soft landing. The [yesterday's] hike is the single-largest repo rate dose since 2004. Growth will begin to moderate. We now expect GDP growth at 7.5 per cent in financial year 2009, from our earlier forecast of 8.1 per cent," said Shubhada Rao, chief economist, YES Bank.
Since 2005-06, the economy has been growing at 9 per cent and more annually. However, tight monetary regime, high inflation, soaring crude oil prices and instability in the global financial system have heightened fears that growth will moderate this year and going forward.
Last month, Finance Minister P Chidambaram had said he was confident that the economy would grow at not less than 8.5 per cent. However, that seems unlikely, even though the finance ministry today said the Reserve Bank of India's move was to moderate aggregate demand and it augured well for growth.
But several experts said the outlook was not as rosy. Tushar Poddar, vice-president (Asia Economic Research), Goldman Sachs, who had earlier forecast GDP growth rate of 7.8 per cent in 2008-09, today said while the repo rate hike would not have a large negative impact on growth, "there are downside risks to the forecast".
Moody's Economy.com said tighter monetary policy would slow India's economy. "GDP growth is expected to moderate from a breakneck pace of 9 per cent in 2007-08 to a still-impressive 7.6 per cent in the current year," said Sherman Chan, economist at the independent provider of economic analysis and data.
However, there are doubts over the efficacy of the monetary steps in dampening inflation, which the RBI says has been driven up by unrelenting pressure from international commodity prices, particularly crude oil and metals.
"There is little expectation that these measures will have an effect on actual inflation any time soon. Inflation will continue at high levels till the end of the year before coming down by mid-January next," said Saugata Bhattacharya, vice-president, Axis Bank. He is also scaling back the 2008-09 GDP forecast from 7.7-8 per cent to 7.5-7.7 per cent.
