Economic growth: Moderate path

The hike in interest rates and CRR by the RBI have seemingly led to economic moderation as the GDP grew at an annual growth rate of 8.9 per cent in the September 2007 quarter compared with 9.3 per cent in Q1 FY08 and 10.2 per cent a year earlier.

The growth was slightly ahead of economists' expectations of 8.7-8.8 per cent. The Sensex rose 1.9 per cent on Friday due to the buoyant global markets and expectations that the central bank is unlikely to increase interest rates further.

The growth in services sector was slower at 10.2 per cent in Q2 FY08 compared with 10.6 per cent in the June 2007 quarter.

However, the industrial slowdown was more visible as industry grew at a rate of 9.1 per cent in the September 2007 quarter compared with 10.6 per cent in Q1 FY08. Within industry, electricity, gas and water supply slowed to 7.3 per cent in Q2 FY08 against 8.1 per cent a year earlier.

The manufacturing sector grew at the rate of 8.6 per cent y-o-y in the last quarter compared with 11.9 per cent in the June 2007 quarter.

Analysts attribute the slower growth in manufacturing sector to higher interest rates affecting domestic growth and the strong rupee impacting exports.

However, the agricultural sector registered a strong growth of 3.6 per cent in Q2 FY08 compared with 2.9 per cent in Q2 FY07.

With interest rates in the US expected to ease, the rupee could strengthen further. However, an anticipated pick-up in domestic demand in the second half of FY08 could contribute to strong GDP growth in Q3 FY08.

The RBI in its mid-term policy review in October 2007 maintained the GDP growth forecast of 8.5 per cent for FY08, while analysts are forecasting growth to be marginally below 9 per cent.