By IANS,
New Delhi : The tough economic condition will prevail, restricting India’s economic growth to 6.3 percent this fiscal and 5 percent in the next financial year, and forcing the central bank to cut repo rate by 4 percent, the economic arm of Moody’s predicted in a statement Friday.
“Moody’s Economy.com foresees tough economic conditions in India for the rest of 2009. Growth for fiscal 2008-2009 will likely slow to around 6.3 percent, and expansion in the following year is set to decelerate to around 5 percent, a modest performance by Indian standards,” it said in the statement.
“The sharp economic slowdown will encourage the RBI (Reserve Bank of India) to trim the repo rate to 4 percent by midyear. The cash reserve ratio may be left on hold until then, as further lowering will do little to boost lending if the current limit is not being tested,” said Sherman Chan, an economist with Moody’s Economy.com.
“Interest rates in India are high compared with those in neighbouring economies. With growth momentum weakening significantly, the Reserve Bank of India is facing strong calls for further monetary easing,” Chan said.
She, however, added that the RBI appeared hesitant, likely because inflation was still a concern. “The most-watched wholesale price inflation rate has slowed considerably, but consumer price growth remained stubbornly strong in double-digit territory.”
According to Chan, “although easing inflation at the producer level should eventually flow through to consumers, no improvement is being seen in the CPI (consumer price index) series. What may matter more to policymakers are the CPI measures, as they have direct implications for living conditions.”
With much of the population in poverty, excessive price growth could trigger social unrest, she said, adding: “The RBI is perhaps waiting for consumer price inflation to moderate.”
The Moody’s economist said India’s fiscal policy was constrained by its “massive” public debt, leaving the central bank to shoulder much of the responsibility for reviving the economy. “Holding the only weapon India has to battle this global storm, the central bank understandably would want to avoid policy missteps and also preserve some bullets for emergency use.”
Incidentally, Planning Commission Deputy Chairman Montek Singh Ahluwalia also said Friday that the economy would log a growth of less than 7 percent this fiscal.