India's economy may slow more than previously estimated, the central bank said in a report, increasing expectations of further cuts in interest rates to encourage investment and consumption.
The economy may expand 7.7 percent in the year ending March 31, according to the median estimates of 13 research groups in September, the bank said. That's less than the 7.9 percent estimate in June, the Reserve Bank of India said in a report on the economy issued in Mumbai, before its quarterly monetary policy announcement tomorrow at 11:15 a.m.
Governor Duvvuri Subbarao this week unexpectedly cut the central bank's key repurchase rate by 100 basis points to 8 percent after pumping one trillion rupees ($20 billion) into the financial system since Oct. 11 by reducing lenders' reserve requirements. Subbarao can afford to ease borrowing costs as inflation risks have receded with the drop in commodity prices.
`Slowdown risks have heightened,'' said Mridul Saggar, chief economist at Kotak Securities Ltd. in Mumbai. `The Reserve Bank is right in changing its stance toward supporting growth, which is clearly faltering.''
The results of a survey of professional forecasters' conducted by the Reserve Bank last month suggest `further moderation in economic activity for 2008-09'' the bank said, without elaborating on the reasons for the slowdown.
India's key wholesale price inflation slowed to a four- month low of 11.07 percent in the week to Oct. 11. Crude oil prices have halved since their peak in July and the Reuters/Jefferies CRB Index of 19 commodities fell 18 percent this month.
`Temporary Slowdown'
Prime Minister Manmohan Singh asked the nation this week to be prepared for a ``temporary slowdown.'' India's $1.2 trillion economy grew a record average 8.9 percent since he became premier in 2004.
India's benchmark Sensitive index fell 3.9 percent to 9,771.70 today, extending a 51 percent decline since January. The yield on the key 10-year government bonds fell 5 basis points to 7.55 percent, while the rupee dropped 1.1 percent to 49.825 a dollar, an all-time low.
The decline in demand is already showing in India. The economy grew 7.9 percent in the three months to June 30 from a year earlier, the weakest pace since the last quarter of 2004. Output at factories, utilities and mines rose 1.3 percent in August from a year earlier after a 7.4 percent gain in July.
The central bank said its business expectations survey among manufacturers showed a 2.6 percent drop for the quarter ending Dec. 31, according to today's report.
While the central bank reiterated that containing inflation in India will remain a top priority, it noted that prices are easing globally because of a drop in food and fuel costs.
