India central bank lowers growth forecast

January 27, 2009

, MUMBAI, Jan 27 – India\’s central bank reduced its growth forecast for Asia\’s third-largest economy on Tuesday due to the deepening worldwide recession as it held leading interest rates at historic lows.

The bank cut its growth estimate for this fiscal year to seven percent "with a downward bias" from an earlier projection of 7.5 to 8.0 percent.

The growth forecast for the year to March was the lowest since 2003.

It came days after figures showed neighbouring China\’s economy grew by nine percent in 2008, slipping back into single digits for the first time in six years.

"The global crisis will dent India’s growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us," Reserve Bank of India governor Duvvuri Subbarao warned.

The bank said it was pausing in its series of aggressive interest rate cuts to assess the impact of the reductions.

"The response to the Reserve Bank’s policy actions over the last several months is still unfolding," Subbarao said in a statement after the monetary policy committee met in the financial hub of Mumbai.

Since last October, the bank has cut its repo rate — the leading short-term rate at which it lends to commercial banks — four times, slashing it by 350 basis points from to 5.5 percent.

The bank on Tuesday also kept its reverse repo rate — the rate at which it borrows overnight — on hold at four percent.

Both rates now are at historic lows, the bank said.

At the same time, Subbarao said the bank was poised to act "swiftly and decisively" to minimise the impact of the global financial crisis on the Indian economy "when evolving external and domestic conditions warrant."
The decision to hold rates drew criticism from some analysts.

"With the constraints on fiscal policy and the risks firmly tilted towards lower growth and lower inflation, we think monetary policy needs to be pre-emptive and aggressive," said Goldman Sachs economist Tushar Poddar.

"The Reserve Bank erred on the cautious side… we think immediate action is necessary," he said.

Monetary policy is the chief tool of Indian authorities to spur growth as the debt-burdened government has little fiscal room to boost the economy through pump-priming spending measures.

"There has been a rapid and marked downturn in the global economic outlook," the bank governor said in a gloomy review of economic developments globally and domestically.

"Bad news from large international financial institutions on a regular basis renews concerns as to when the global financial sector might attain a semblance of stability," Subbarao said.

"There is now (also) distinct evidence of further slowdown (in the Indian economy) as a consequence of the global downturn," he said, citing declining industrial and export output and worsening business sentiment.

"Contrary to the expectation of decoupling, which was a commonly held view even till recently, the crisis has spread to the emerging economies too," he said.

Up to recently as the US-led financial crisis ballooned, Indian policymakers comforted themselves, saying the country, with its dynamic and vast domestic market of 1.1 billion people, had "decoupled" from the West.

But on a "positive note," the bank forecast inflation would fall below three percent by the end of March, down from an earlier seven percent estimate.

Inflation now stands at 5.60 percent, half its level last August, helped by sharp falls in global commodity prices.

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